GBP/USD Eyes Bearish Reversal
The Federal Reserve’s Anticipated Rate Decision
GBP/USD experienced depreciation after four days of gains, trading near 1.3800 during Friday’s Asian session. Technical analysis indicates a potential bearish reversal, suggesting weakening buyer momentum within the rising wedge pattern.
The pair remains above the nine-day and 50-day Exponential Moving Averages (EMA), indicating a bullish outlook. With the short-term average rising above the medium-term, the strength of the trend is firm, hinting that dips may be temporary if the price respects the rising averages.
GBP/USD is on course for a second consecutive week of gains as the US Dollar weakens, impacted by trade war rhetoric. The Pound Sterling could close in the green for the third month in a row against the US Dollar, achieving multi-year highs.
The Federal Reserve is set to announce its first rate decision of the year on Wednesday, likely with no changes expected. Attention will be on forward guidance regarding potential rate cuts, with futures markets anticipating two quarter-point cuts by the end of 2026.
GBP/USD trades at 1.3776, up 0.76%, after reaching a four-year high of 1.3791. The US Dollar loses appeal amid upbeat sentiment, as tariff threats from President Trump are set to rise for South Korea.
With GBP/USD testing four-year highs around 1.3800, the immediate momentum suggests a bullish stance. The weakness in the US Dollar is the main driver, fueled by the reignited ‘Sell America’ trade rhetoric. We should consider buying near-term call options to capitalize on a potential break toward 1.3900 or even higher.
The dollar’s decline is supported by fundamentals, as the latest data from late 2025 showed the US trade deficit widened unexpectedly. These trade tensions, particularly the threat of increased tariffs on South Korea, are likely to keep the dollar suppressed heading into the Federal Reserve meeting. Historically, we saw similar trade disputes in 2025 cause significant dollar underperformance against major currencies.
All eyes are on the Fed’s forward guidance this Wednesday, as markets are already pricing in future easing. The CME FedWatch Tool currently shows a greater than 75% probability of the first rate cut occurring by June 2026. This policy outlook contrasts sharply with the Bank of England, which in its December 2025 meeting signaled it would hold rates firm with UK inflation still running at 3.1%.
This policy divergence makes long Pound positions attractive against the dollar. We see this as an opportunity to sell out-of-the-money put options on GBP/USD, collecting premium based on the view that the pair will remain supported above key levels like the 50-day EMA. The strong trend strength suggests dips will likely be bought quickly.
However, we must note the technical warning signs of a rising wedge pattern, which indicates buyer exhaustion. This suggests that purchasing put options with a strike price below 1.3700 could be a prudent hedge against a sharp reversal if the Fed delivers a surprisingly hawkish message. A break below the nine-day EMA would be our first signal that the upward momentum is failing.
Given the high-impact event risk of the Fed meeting, implied volatility is expected to rise. This presents an opportunity for a long volatility strategy, such as a straddle, which involves buying both a call and a put option at the same strike price. Such a position would profit from a significant price move in either direction following the central bank’s announcement.
