The GBP/USD pair climbed above 1.3250 as the US Dollar lost ground, driven by expectations of a Federal Reserve interest rate cut. The CME FedWatch Tool showed an 84% chance of a 25-basis-point cut in December. The Pound Sterling gained strength too, following the UK Autumn Budget, which announced £26 billion in tax increases. The GBP/USD pair has now risen for six consecutive days, trading around 1.3260 during Thursday’s Asian session. This increase is linked to the US Dollar’s poor performance, as expectations of a rate cut from the Fed grew.

US Economic Indicators

Even though US Jobless Claims and Durable Goods Orders showed unexpected strength, the anticipation of a rate cut remained. The FedWatch Tool showed the odds of a rate cut increased from 30% last week to over 84% for December. Initial Jobless Claims dropped to 216,000 for the week ending November 22, which was lower than the expected 225,000. The Pound got a boost from fiscal measures, with the UK budget revealing £26 billion in tax hikes. The Office for Budget Responsibility mentioned these actions leave £22 billion of fiscal space, but pointed out the challenges ahead. Pound Sterling is the UK’s currency and the fourth most traded in the world. Its value is greatly affected by economic indicators like GDP and trade balance, which, in turn, influence the Bank of England’s policies and investor interest. The strong expectation of a Federal Reserve rate cut in December is putting pressure on the US Dollar. Recent US CPI data for October showed a decrease to 2.8%, leading markets to price in an 84% likelihood of a cut. This opens up opportunities to bet on a weaker dollar against currencies with a more hawkish central bank stance.

Monetary Policy Divergence

In contrast, the Bank of England is likely to keep its rates steady since UK inflation remained sticky at 3.5% as of October. This divergence in interest rate policies makes the Pound Sterling more appealing compared to the US Dollar. This is the main reason why GBP/USD is reaching levels we haven’t seen in three years. With this upward trend, we are looking at buying GBP/USD call options with strike prices above the current 1.3300 level, aiming for a target around 1.3500 for the new year. The UK’s new budget, which raises taxes, has brought more stability to the Pound, which is a positive shift from the volatility experienced after the 2022 mini-budget crisis. This fiscal discipline strengthens the currency’s base. However, we should be aware that this trend is becoming crowded. Implied volatility in the options market is now over 10% for one-month contracts. Therefore, selling out-of-the-money GBP/USD put spreads could be a safer way to gain bullish exposure while also earning premium. This strategy works well if the pair keeps rising, stays flat, or only falls slightly. Create your live VT Markets account and start trading now.

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