The Pound Sterling dipped slightly against the US Dollar by the end of 2025, nearing 1.3455 in the European session. While it performed well against major currencies, like the New Zealand Dollar, it struggled due to a strengthening US Dollar.
The Bank of England cut interest rates by 25 basis points to 3.75% and hinted at gradual decreases in the future. It expects inflation to drop to about 3% in early 2026 and closer to 2% by mid-2026.
UK Labour Market Weakness
The UK job market showed signs of weakness, with an unemployment rate of 5.1% as of October 2025. Employers were reluctant to hire due to higher social security contributions.
The US Federal Open Market Committee forecasts a rise in the US Dollar Index, nearing 98.35. The FOMC suggests possible interest rate cuts amid tough labor conditions, indicating a 76.1% chance for a 50 basis point cut in 2026.
Technical analysis reveals that GBP/USD is above its 20-day EMA at 1.3410, suggesting a positive near-term outlook. The RSI at 60 supports this trend, but resistance at 1.3494 may limit future gains.
Policy Divergence
The key takeaway is the widening gap between the Bank of England (BoE) and the Federal Reserve’s plans. The BoE is moving slowly on rate cuts, while the markets expect at least two cuts from the Fed in 2026. This difference is a strong reason to prefer the Pound over the US Dollar in early 2026.
However, the UK’s weak labor market is a concern, as unemployment stands at 5.1%. Recent data from the Office for National Statistics shows job vacancies have fallen for the sixth straight quarter, confirming this trend. Traders might consider selling out-of-the-money GBP/USD call options with strike prices above 1.3600 to protect against potential caps on the Pound’s rise due to domestic economic weakness.
On the US side, the upcoming appointment of a new Fed Chair in January could cause market volatility. In early 2018, we saw significant market fluctuations during the transition from Yellen to Powell, which affected the Dollar Index. Traders should think about buying options straddles on the US Dollar Index (DXY) to take advantage of possible large price swings once the decision is made.
Technically, the GBP/USD pair is testing resistance at 1.3494, a level that has previously limited gains. A sustained move above this level could lead to a larger rally, making short-term call options with a 1.3500 strike price for late January appealing. This strategy lets us benefit from a potential breakout while keeping our risk limited to the premium paid.
Create your live VT Markets account and start trading now.
here to set up a live account on VT Markets now
