GBP/USD is trading around 1.3490, down 0.10% on Monday. The currency pair remains stable as markets assess the different rate strategies of the Federal Reserve (Fed) and the Bank of England (BoE), particularly during this quieter holiday season. The Pound lacks support even with expectations for the BoE to gradually ease monetary policy in 2026. Inflation in the UK was 3.2% in November, which is still above the 2% target, but it has decreased from its peak of 3.8% between July and September. The BoE recently cut interest rates by 25 basis points to 3.75%, but further reductions seem limited as rates approach a neutral level.

Economic Growth and Rate Expectations

The BoE anticipates little growth, with UK GDP rising only 0.1% in the third quarter. At the same time, the US Dollar is seeing a slight rebound, with a faster easing cycle expected from the Fed next year. According to the CME FedWatch tool, there is a 70% chance of cumulative rate cuts of at least 50 basis points. The Fed’s projections indicate few rate cuts by 2026, suggesting a Federal Funds Rate around 3.4%, which differs from market expectations. Speculation on US monetary policy has increased following President Trump’s support for lower rates, with a focus on the upcoming FOMC Minutes. The British Pound’s performance against various currencies shows it was strongest against the New Zealand Dollar.

Diverging Monetary Policies

As we approach the new year, attention is on the diverging paths of the Bank of England and the Federal Reserve. With GBP/USD holding steady around 1.3490 in thin holiday trading, this divergence may lead to opportunities in the coming weeks. The goal is to position for a potentially stronger pound against a dollar affected by expectations of quicker rate cuts. The Bank of England’s caution is understandable given that inflation, though down to 3.2%, is still above target. The inflation shock from 2022-2023 remains fresh in their minds, prompting the BoE to proceed cautiously, as reflected in their recent narrow rate cut vote. This careful approach should support the pound, especially as the latest UK wage growth from the ONS stands at 5.7%, contributing to domestic price pressures. On the other hand, the market is pricing in significant Fed rate cuts for 2026, with expectations for at least 50 basis points of easing. This sentiment persists despite the Fed’s projections indicating a shallower cutting cycle. The gap between market expectations and official guidance is a vulnerability for the dollar, especially after US Core PCE, the Fed’s favored inflation measure, dropped to an annual rate of 2.8% in November 2025. Given this situation, we should explore strategies that could benefit from a stronger GBP against the USD. Buying GBP/USD call options or call spreads for late January or February 2026 could be effective if the pair breaks above 1.3500, with minimal risk involved. Implied volatility may be low during this holiday period, making options an appealing choice before the first major data releases of the new year. The immediate focus will be the FOMC minutes due this Tuesday, which will be closely examined for any signs of a dovish shift among policymakers. We should look for discussions that support the market’s aggressive pricing of rate cuts compared to the Fed’s official dot plot. Following that, the upcoming US and UK inflation reports in mid-January will be crucial in affirming or disputing the current narrative of policy divergence. Create your live VT Markets account and start trading now.

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