GBP/USD dipped slightly as the US Dollar gained some support in a thin holiday market. The exchange rate hovered around 1.3500, briefly peaking at 1.3534, the highest level since September 19. Recent US labor market data sent mixed signals. Initial Jobless Claims dropped to 214K, below expectations, while Continuing Claims rose to 1.923 million. The four-week average for Initial Claims edged down to 216.75K. Although there was a slight rebound, the US Dollar continues to face pressure due to predictions of the Federal Reserve easing rates into 2026.

US Dollar Index Movement

The US Dollar Index was around 97.95, slightly above its lowest point since early October. Market forecasts suggest the Fed will keep interest rates steady at its January meeting, with little chance of a rate cut. Fed Chair Jerome Powell emphasized the Fed’s willingness to monitor future economic trends. In the UK, the Bank of England (BoE) is expected to be cautious about changing its policy in 2026. UBS anticipates two rate cuts of 25 basis points each in early 2026, potentially lowering the Bank Rate to about 3.25%. Ongoing services inflation and high wage growth may slow the BoE’s easing pace. The current holiday lull in the markets creates an opportunity for positioning as we look ahead. There is a noticeable gap between the Federal Reserve’s easing expectations and the Bank of England’s measured approach. This difference will likely drive GBP/USD as we approach early 2026.

US Dollar And Sterling Outlook

The US Dollar remains weak despite solid economic data, such as a 2.1% Q3 2025 GDP reading. However, with November’s core CPI falling to 2.8%, the market is pricing in Fed rate cuts for next year. This expectation dampens any major dollar rallies and boosts the pound’s relative strength. On the other hand, Sterling benefits from stubborn inflation, with the UK’s November CPI holding at 3.5%. This gives the BoE reason to be cautious about quick rate cuts. We believe the BoE will lag behind the Fed in its easing cycle, which should support the pound. For derivative traders, buying call options on GBP/USD could be a smart move to take advantage of potential gains in the first quarter of 2026. Low implied volatility during the holiday season makes options more affordable. A similar low-volatility period in late 2023 was followed by a significant trend move in early 2024. The main risk to this outlook is the thin trading volume in the coming week, which could lead to sudden and unpredictable price shifts. We also need to closely watch January’s employment and inflation reports from both countries. A surprisingly strong US jobs report, for instance, might temporarily challenge the idea of a weaker dollar. Create your live VT Markets account and start trading now.

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