GBP/USD has climbed to about 1.3510 during Asian trading hours on Monday, driven by challenges faced by the US Dollar. This rise comes alongside expectations of two more rate cuts by the Federal Reserve (Fed) in 2026. Attention is focused on the Federal Open Market Committee (FOMC) December Meeting Minutes, which will be released on Tuesday. These minutes will provide clarity on the Fed’s policy plans for 2026. In December, the US central bank lowered the federal funds rate by 25 basis points (bps), setting the new target range at 3.50%–3.75%.

Market Expectations

According to the CME FedWatch tool, there is an 81.7% chance that rates will stay the same at the Fed’s January meeting, up from 77.9% last week. At the same time, the chance of a 25-basis-point rate cut has dropped to 18.3% from 22.1%. Recent US labor market data has mixed results. Initial Jobless Claims fell to 214K, better than the expected 223K. However, Continuing Jobless Claims rose to 1.923 million, while the four-week average of Initial Claims slightly decreased to 216.75K. The Bank of England (BoE) has lowered its policy rate by 25 bps to 3.75% due to ongoing inflation concerns. Inflation fell to 3.2% in November but stayed above the BoE’s 2% target, with UK GDP growing by 0.1% in Q3. As of December 29, 2025, the main focus is the differing outlooks between the US Federal Reserve and the Bank of England. The market is anticipating more aggressive Fed rate cuts for 2026, weakening the US Dollar and pushing GBP/USD higher. We should prepare for continued, though possibly volatile, gains in this currency pair. The Fed’s cautious approach is backed by easing inflation and a labor market that is softening but not collapsing. With US Core PCE inflation, the Fed’s favored measure, dropping to 3.1% in November 2025, the 75 basis points of cuts this year seem warranted. The forthcoming FOMC minutes are crucial, as they will show how strongly the consensus supports further easing in 2026.

Bank of England’s Stance

On the other hand, the Bank of England faces more challenges, making the Sterling more appealing for the time being. The tight 5-4 vote for the rate cut earlier this month shows serious concerns about UK inflation, which remains high at 3.2%, amid stagnant economic growth. This internal divide suggests that the BoE will be slower and more cautious in making further cuts compared to the Fed. For derivative traders, this situation suggests buying GBP/USD call options, targeting strikes around the 1.3650 level in the coming weeks. This strategy allows us to profit from potential gains while limiting our maximum risk. The premium paid is the most we could lose if the dollar unexpectedly strengthens. We should also keep in mind that important data releases, like the FOMC minutes tomorrow, could bring short-term volatility. The mixed signals from recent US jobless claims data indicate that the economic outlook is not completely clear. For those uncertain about the direction, buying a short-dated straddle could be a smart way to profit from significant price movement in either direction. Looking back, we can see similarities to the 2010-2012 period when currencies supported by less dovish central banks tended to perform better. The current situation, with the BoE constrained by inflation and the Fed having more room to cut, mirrors this historical trend. This strengthens the belief that GBP/USD is likely to rise as we move into early 2026. Create your live VT Markets account and start trading now.

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