The Pound Sterling fell to around 1.3190 against the US Dollar during the European trading session on Tuesday. This drop happened even though the US Dollar was recovering, despite disappointing ISM Manufacturing PMI data for November. After the UK’s Autumn Statement, the Pound rose above 1.3275, moving away from its lows in early November. The UK’s Budget helped ease worries in the gilt market and provided more fiscal flexibility. However, future interest rate cuts are still possible due to soft inflation and challenges in the labor market.

Support Amid Budget Controversy

With some controversy surrounding the budget, Prime Minister Keir Starmer backed Chancellor Rachel Reeves and the Office for Budget Responsibility. Concerns about financial stability were addressed, even with the political backlash from a premature report release. The Pound is now pulling back towards 1.3190 against the US Dollar after a brief rally post-Autumn Statement. This recent strength may be temporary, as the US Dollar is gaining ground. The initial optimism is fading as the market takes in the details. That rally had pushed the Pound above 1.3275, but there’s underlying weakness indicating this level may be hard to maintain. While the budget reduced some immediate fears, the key issue is that the Bank of England is still likely to lower interest rates. The latest data from mid-November 2025 showed UK inflation dipping to 2.1%, making a rate cut in early 2026 more likely. Additionally, the UK labor market is showing signs of weakness, with the unemployment rate rising to 4.5% in the last quarter. This softening gives the Bank of England more reasons to ease monetary policy sooner. For traders, this means that any strength seen in the Pound could be a chance to prepare for a downturn.

Impact of US Economy Divergence

Meanwhile, the US economy is telling a different story. Recent data showed US Core PCE inflation, an important measure for the Federal Reserve, steady at 2.8%. This stability suggests that the Fed will not rush to cut rates, creating a policy divergence that favors a stronger Dollar. This situation indicates that we should be prepared for increased volatility in GBP/USD. We can consider options strategies to guard against a potential drop in the Pound’s value in the coming months. The likelihood of the Pound gradually declining rather than suddenly falling may present a good opportunity for selling call options or buying puts during rallies. We remember the struggles the Pound faced in the years after 2016 when interest rate expectations between the UK and the US moved in opposite directions. History shows that when the Bank of England is cautious while the US Federal Reserve remains firm, it puts lasting pressure on the GBP/USD exchange rate. This trend seems to be returning now. Create your live VT Markets account and start trading now.

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