The Pound Sterling is steady as the week begins, with attention turning to the Federal Reserve’s (Fed) interest rate decision. The market expects both the Fed and the Bank of England (BoE) to lower rates by 25 basis points (bps) this month. After the potential cut, the Fed might pause further rate changes since inflation is still above the 2% target. Right now, the Pound Sterling has dropped slightly against major currencies and sits at about 1.3320 vs. the US Dollar. With few UK economic updates this week, global events could sway the British currency, and market expectations also reflect the BoE’s monetary policy outlook.

UK Economic Outlook

Many believe the BoE will cut rates due to a weak labor market and slowing inflation. Unemployment rose to 5% in September, and the Consumer Price Index for October indicated a 3.6% annual inflation rate, the lowest in four months. Market attention is on the Fed’s possible 25 bps cut, which has an 87% probability according to the CME FedWatch tool. The Fed’s cautious stance is due to a faltering job market. John Williams from the New York Fed noted slower growth and low labor demand. The Pound Sterling stabilizes vs. the US Dollar around 1.3320. Technical analysis reveals that it resides above the 20-day Exponential Moving Average and displays bullish momentum, as indicated by the 14-day Relative Strength Index at 60. The Federal Reserve meets eight times a year to discuss policies that affect the US Dollar, including interest rate adjustments and Quantitative Easing or Tightening. With the GBP/USD pair near 1.3320, we are focused on the Federal Reserve’s interest rate decision this Wednesday. The market has mostly anticipated a 25 bps cut, so the real movement will depend on the Fed’s guidance for 2026. We expect a similar cut from the Bank of England next week.

Market Reactions and Strategies

The arguments for a Fed cut are strengthened by the November jobs report, which showed non-farm payrolls rose by only 150,000 and the unemployment rate increased to 4.2%. However, with November’s core inflation stuck at 3.8%, the Fed may indicate a lengthy pause after this cut. This creates a situation where the dollar could strengthen if the Fed’s tone is more aggressive than expected. On the UK side, economic data points to a likely rate cut. The unemployment rate has reached 5%, and October’s annual inflation rate dropped to 3.6%. Recent wage growth also slowed to 4.5%, which eases a key concern for the Bank of England and supports a looser policy. Since rate cuts are widely anticipated, traders should prepare for “buy the rumor, sell the fact” price action, especially concerning the US dollar. We observed similar reactions after the rate adjustments in early 2024, where forward guidance influenced market direction more than the actual rate decision. Thus, comments from Fed officials will matter more than the cut itself. For options traders, these expected policy announcements create opportunities to benefit from rising implied volatility. A straightforward strategy could be to buy straddles on GBP/USD or EUR/USD before the Wednesday announcement to profit from significant price movements in either direction. The key is to set up for the volatility that will follow the central bank’s updated economic forecasts. Technically, GBP/USD appears to have a positive trend as long as it stays above the 20-day moving average around 1.3227. A critical level to monitor is the 1.3400 resistance; a significant break above this level could lead to a rise toward the October high of 1.3471. If it fails to break this level, the pair may consolidate before the Bank of England’s meeting next week. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now