The GBP/USD pair is slightly up, trading around 1.3510 in the early European session. The Pound is gaining strength as the Bank of England (BoE) takes a gradual approach to changing its monetary policy. In December, the UK central bank lowered its interest rate by 25 basis points to 3.75%. The BoE has indicated that further cuts may be possible, with the market expecting at least one cut in the first half of the year, and nearly a 50% chance of a second cut within the year.

GBP/USD Market Activity

GBP/USD is performing well, staying above 1.3500. However, trading volumes may be lower as the year comes to an end, limiting significant price changes. This week, there aren’t many economic data releases from the UK, which could affect market activity. On Monday, GBP/USD was around 1.3490, showing a slight drop of 0.10%. The market is consolidating as the holiday period reduces liquidity. The Pound Sterling (GBP) is facing limited support due to expectations that the BoE will ease its stance, even as UK inflation stays above the 2% target. Annual inflation dropped to 3.2% in November after peaking at 3.8%, leaving the central bank with less flexibility for policy changes. As GBP/USD hovers around 1.3500, the market seems to be pricing in a slow pace for future rate cuts by the Bank of England. The 25 basis point reduction in December brought UK rates down to 3.75%. But with inflation still at 3.2% in November, the BoE’s options remain limited. This situation suggests that the Pound Sterling may have solid support as we move into the new year.

U.S. Federal Reserve Policy Divergence

A key factor to watch is the differing policies between the U.S. Federal Reserve and the BoE. The Fed is expected to release minutes soon. U.S. inflation has decreased more effectively, with recent reports indicating a Core PCE figure around 2.8%, giving the Fed more room to ease its policy in 2026. This difference in inflation may create opportunities in the currency pair. With reduced trading during the holidays, we anticipate increased volatility as the market fully engages in the first weeks of January 2026. Historically, January brings significant price adjustments, and this year is expected to continue that trend as new data emerges. Using options like straddles to buy volatility could be a practical way to prepare for a breakout without committing to a specific direction. For a more focused strategy, the BoE’s relatively hawkish stance compared to the Fed supports a stronger Pound Sterling. We see potential in purchasing call options with strike prices above 1.3600, expecting a rise as the market adjusts to the likelihood that UK rates will remain higher for longer than U.S. rates. This approach provides defined risk while allowing for potential gains as liquidity improves. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now