The GBP/USD pair fell to about 1.3365 during the early European session due to a stronger US Dollar. However, losses were limited after the US Federal Reserve cut interest rates at its December meeting.

Federal Reserve’s Decision

The Federal Reserve has lowered its main interest rate for the third time in a row, but it indicated that further cuts might pause for now. The vote from the Federal Open Market Committee (FOMC) was split 9-3, with two members against the cut and one pushing for more significant reductions. After the Fed’s decision, the GBP/USD pair rose to seven-week highs, reaching the 1.3400 level. Fed Chair Jerome Powell took a cautious stance, noting that rate markets expect cuts to happen faster in the coming years than what the Fed predicts. While the Fed expects just one cut next year, the futures market is anticipating several reductions by 2026. The Summary of Economic Projections shows the funds rate may be close to 3.4% next year, indicating only one 25-basis-point cut in 2026. Stocks fluctuated before the meeting, but stabilized afterward, reflecting market sentiment. The Fed’s recent rate cut occurred alongside a disappointing US jobs report from November 2025, which revealed an increase of only 115,000 jobs. The latest consumer price data also showed inflation cooling to 2.8%, giving the Fed room to adjust policy. Upcoming weekly jobless claims will provide further insight into the US economy’s health.

UK’s Economic Landscape

On the UK side, the Bank of England has kept its interest rates steady, diverging from the US approach. Slow UK GDP growth of just 0.1% in the third quarter of 2025 may lead to potential cuts in early 2026, limiting the pound’s potential gains, even in a weaker dollar environment. For derivative traders, this uncertain policy landscape suggests increased volatility. The disagreement between market expectations for further rate cuts in 2026 and the Fed’s projections could result in significant price fluctuations. Options strategies, like straddles, may help investors profit from these anticipated movements, no matter the direction. As the market anticipates that the Fed may have to cut rates more than indicated, taking positions against dollar strength seems sensible. This could mean buying call options on GBP/USD, but caution is advised due to the UK’s economic challenges. This marks a significant shift from the aggressive rate hikes seen just two years ago in 2023. Looking forward, we should pay close attention to comments from Fed officials in the coming weeks for any changes in their cautious stance. Any data suggesting a slowdown in the US economy could reinforce this view and likely push GBP/USD higher. The next significant triggers will be the inflation and employment reports for December 2025. Create your live VT Markets account and start trading now.

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