The GBP/USD pair was around 1.3480 early Friday in the Asian session. Markets expect the US Federal Reserve might cut interest rates, potentially weakening the USD. In 2025, the US Dollar experienced its biggest annual decline in eight years. There is a 15% chance of a rate cut by the Fed in January, highlighting a different approach to rates compared to the UK.

Fed Chair and Interest Rates

President Trump prefers a dovish replacement for Fed Chair Powell to keep interest rates low, raising concerns about the Fed’s independence in making decisions. The Bank of England has gradually lowered rates to 3.75%, the lowest in three years. Governor Andrew Bailey mentioned that further cuts are uncertain for upcoming meetings. The UK currency, Pound Sterling, is issued by the Bank of England and is among the most traded globally, ranking fourth, with daily transactions averaging $630 billion in 2022. Economic reports on GDP, PMIs, and employment can influence the Pound. Strong data tends to boost GBP while weak data may cause it to drop.

Trade Balance and Currency Impact

Trade Balance figures, which compare exports and imports, impact the Pound’s stability. A positive balance increases demand for the currency, raising its value. With GBP/USD rising above 1.3450, the main reason seems to be the expected weakness of the US Dollar. The recent December 2025 non-farm payrolls report showed only 95,000 jobs added, far below the expected 150,000. This suggests the Federal Reserve may need to cut rates soon, putting pressure on the dollar and making the pound more appealing. For traders, this indicates a favorable outlook for GBP/USD in the short term. We recommend buying call options for February or March 2026 to take advantage of this trend while managing risks. Strike prices around 1.3550 and 1.3600 seem promising based on current trends. The Bank of England’s cautious approach to rate cuts helps support the pound. In contrast, the latest Core PCE inflation figure for November 2025 in the US dropped to 2.8%, while UK inflation is steadier at 3.1%, giving the BoE less pressure to cut rates quickly. This difference in policy is a key factor in our trading strategy. Political uncertainty surrounding the next Fed Chair could add volatility to the market. In this environment, going long through futures may carry extra risks, making options strategies like bull call spreads more appealing. These strategies can mitigate increased option costs due to higher implied volatility. Historically, the dollar’s significant decline in 2025 was its worst since 2017, indicating a major shift. In previous cycles where the Fed shifted towards easing so quickly, the dollar often stayed weak for several quarters. We believe this current situation may mark the start of a similar trend into early 2026. Create your live VT Markets account and start trading now.

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