The GBP/USD pair is currently trading positively around 1.3510 in early European trading. This comes as the Bank of England (BoE) plans to gradually ease monetary policy in 2026 after recently lowering the interest rate to 3.75%. Even with growing expectations for slower easing from the BoE, the upcoming US economic data may present challenges for the GBP. The US GDP grew by 4.3% in the third quarter, exceeding the forecast of 3.3%. Traders are also awaiting the US Initial Jobless Claims report, which is expected to show about 223,000 claims for the week ending December 13.

The Pound Sterling and BoE Policies

The Pound Sterling (GBP) is the oldest currency in the world and makes up 12% of global foreign exchange transactions. The BoE’s interest rate decisions, aimed at achieving a 2% inflation rate, significantly influence the Pound’s value. Higher interest rates attract global investment and strengthen the GBP, while lower rates are used when inflation is too low. Economic data like GDP and PMIs also impact the Pound; strong figures may lead to interest rate hikes to boost its value. Furthermore, a positive Trade Balance, indicating more exports than imports, can enhance currency strength. For the next few days, we can expect a quiet market due to the Christmas holiday, with GBP/USD staying just above 1.3500. With lower liquidity, any movements in the market could be more pronounced until trading normalizes in the new year. Caution is advised when making larger trades this week. The BoE’s recent interest rate cut to 3.75% was anticipated. However, their signal for a slow and steady easing path is what stands out. Although UK inflation has dropped significantly from earlier 2023 peaks (above 7%), it remains around 3.1%, which is well above the 2% target. This ongoing inflation keeps the Pound strong since it makes the central bank wary about cutting rates too quickly.

Policy Divergence and Trading Strategies

On the other hand, the US economy is demonstrating surprising strength, as shown by the Q3 GDP growth of 4.3%, which far exceeded expectations. This robust economic performance and a core inflation rate of 3.5% reported by the Bureau of Labor Statistics indicate that the Federal Reserve is unlikely to rush into rate cuts. The differing policies between the easing BoE and the cautious Fed are likely to limit how high the GBP/USD pair can rise. In the upcoming weeks, we could see increased volatility. Conflicting economic indicators may pull the pair in different directions, making strategies that can profit from price changes—like buying straddles—potentially beneficial as we approach January 2026. We anticipate a breakout from the current tight trading range once full liquidity returns. Since the interest rate differential now favors the US dollar, we view any rallies in the Pound as chances to take bearish positions. The Federal Funds Rate stands at 4.50%, creating an advantage for holding short GBP/USD positions. We can consider buying put options to limit our risk while allowing for downside exposure, especially if the pair struggles to maintain gains above the 1.3550 level. Create your live VT Markets account and start trading now.

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