Economic and Market Sentiment Update

The GBP/USD pair rose on Friday, bouncing back from earlier losses as the US Dollar weakened. This shift came as expectations grew for a Federal Reserve rate cut in December. The pair was at 1.3349, climbing 0.19%, supported by unchanged US Core PCE Price Index growth of 0.2% compared to last month. In December, the University of Michigan’s Consumer Sentiment rose to 53.3, up from 51 in November, beating the forecast of 52. Inflation expectations fell for Americans, dropping from 4.5% to 4.1% for one year and from 3.4% to 3.2% for five years. The likelihood of a 25 basis points Fed rate cut at the next meeting remains steady at 84%. Following the data release, GBP/USD approached 1.3350 after starting around 1.3340. Morgan Stanley predicts rate cuts of 25 basis points in December, January, and April 2026, estimating the Fed funds rate will end up between 3% and 3.25%. Meanwhile, the UK anticipates a 25 basis point cut by the Bank of England in December. GBP/USD faces resistance at the 100-day Simple Moving Average of 1.3365. If this level is broken, the next important threshold is October’s high of 1.3471, followed by 1.3500. This week, the British Pound performed best against the Swiss Franc, gaining 0.9%.

Strategic Trading Opportunities

With a Federal Reserve rate cut almost certain next week, the US Dollar is expected to weaken further. The market indicates an 84% chance of a cut, driving the GBP/USD pair closer to key resistance levels. For traders, this might be a good time to buy call options, aiming for gains in Sterling above the 1.3400 mark. Today’s core PCE inflation rate of 2.8% is a significant development, keeping inflation within a manageable level for the Fed. Remember, late last year, core PCE was still quite high at 3.5%, confirming the ongoing disinflation trend needed for policy changes. This strengthens the case for a continued decline in the dollar, making long positions in GBP/USD futures attractive in the coming weeks. Though implied volatility in the pound has been low, we anticipate it will rise around the upcoming Fed and Bank of England meetings. Historically, we’ve seen volatility increase during policy changes, and this pattern will likely repeat. Traders might consider selling out-of-the-money put options on GBP/USD to collect premium while betting that the pair stays above key support levels, like 1.3300. We should also keep an eye on the Bank of England, expected to lower its rate to 3.75% on December 18th. Right now, however, the market is more focused on the Fed starting a longer easing cycle, reminiscent of the late 2010s. This suggests the US Dollar might have more room to drop than the Pound, supporting the GBP/USD pair even with both central banks easing. Currently, the key technical level is the 100-day moving average at 1.3365. If the pair breaks above this level decisively, especially after the Fed’s announcement, it would indicate a new upward trend. We believe that buying call spreads is a smart strategy, targeting a move toward the October high of 1.3471. Create your live VT Markets account and start trading now.

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