GBP/USD increased after the Bank of England (BoE) cut rates by 25 basis points in a close 5-4 vote, showing some hawkish sentiment. The pair traded at 1.3410, up 0.28%, due to a softer US Consumer Price Index (CPI), which fell to 2.7% year-on-year in November.
The US core inflation also dropped to 2.6% from 3%, indicating less pressure on prices. Initial Jobless Claims for the week ending December 13 fell to 224,000, better than the expected 225,000. Despite these indicators, expectations for a Federal Reserve rate cut in 2026 remained stable at 62 basis points.
Impact of the BoE Rate Cut
The BoE’s rate cut from 4% to 3.75% helped push GBP/USD higher. Meeting minutes revealed uncertainty about future rates, with inflation data pointing to both promises and risks.
Looking ahead, important US economic data on Personal Consumption Expenditures Price Index and Michigan Consumer Sentiment is coming soon. Meanwhile, in the UK, traders will keep an eye on November’s Retail Sales, hoping for an increase from 0.2% to 0.9% year-on-year.
Technical analysis of GBP/USD shows that bullish momentum is fading, with support around 1.3361 and resistance at 1.3460. If the price closes below 1.3400, it may test lower levels, while a rise above 1.3460 could aim for the 1.3500 target.
The BoE’s divided vote on the rate cut gives reason to be optimistic about sterling, suggesting a hesitation to loosen policy further. However, the weak US inflation numbers raise questions due to the recent 43-day government shutdown, adding uncertainty as we approach year-end trading.
Volatility and Trading Strategies
We should be cautious with the US CPI data, as its collection was incomplete. Past data issues during the 35-day shutdown in 2018-2019 led to sharp market reactions. The upcoming PCE inflation data is critical to either confirm or challenge this week’s soft readings.
Currently, implied volatility on GBP/USD options is unusually low, especially compared to spikes over 20% seen during the UK’s 2022 fiscal crisis. Buying volatility through strategies like straddles could be wise, as they would benefit from significant price swings in either direction once the true inflation trend is clearer.
For those optimistic about the pound, the failure to break the 1.3455 resistance is a warning sign. Instead of outright calls, a bull call spread may allow for some upside potential while keeping costs low. This is a more efficient way to bet that the pair will trend higher without an explosive breakout.
On the flip side, diminishing momentum on the RSI and strong US jobless claims support the case for a pullback. A drop below the 1.3400 level could target key moving averages around 1.3350. A bear put spread could be a defined-risk strategy for this potential short-term weakness in the cable.
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