The GBP/USD fell after the US Federal Reserve reduced interest rates by 25 basis points. This cut was expected by the market and, while it didn’t greatly disrupt trading, it did push the currency pair down. The Federal Reserve also announced plans to cut back on its Quantitative Easing (QE) by moving into long-term Treasuries by December 1. This is the second rate cut in a row, even with rising inflation in the second half of the year, which didn’t stop the Fed from lowering rates again.

Looking Ahead to the Next Fed Meeting

The Federal Open Market Committee (FOMC) will meet again on December 10, and many in the market believe a third rate cut could happen. The Federal Reserve holds eight meetings every year to decide on interest rates to aim for 2% inflation and full employment. Interest rate changes affect the strength of the US Dollar. Rate increases generally attract foreign investment, which strengthens the USD. On the other hand, rate cuts can weaken the USD as investments move to countries offering better returns. After the Fed’s second rate cut on October 29, 2025, we are seeing a cautious period of dollar weakness. The expected 25-basis point cut kept the drop in GBP/USD limited. The main focus now is the December 10 FOMC meeting for hints of another rate cut. The Fed’s mixed signals—cutting rates while continuing to reduce its balance sheet—could lead to more dollar volatility. This creates opportunities for option traders, as strategies like long straddles on key USD pairs might profit from large price movements. This could be a smart approach given the uncertainty as we head into the end of 2025.

Inflation and Labor Market Pressures

The chance of a third rate cut is uncertain due to ongoing inflation concerns. The latest Consumer Price Index for September 2025 showed inflation stuck at 3.6%, well above the Fed’s 2% target. With the labor market tight—evidenced by 215,000 new jobs in September—some Fed officials might hesitate to cut rates again soon. In the UK, the Bank of England is unlikely to start cutting rates either. The UK’s inflation rate for September 2025 was released at 5.1%, much higher than the US figure. This difference in policy—where the Fed is easing while the BoE is not—indicates potential further weakness for GBP/USD. Thus, it may be wise to prepare for a continued decline in the pound against the dollar in the coming weeks. Traders might consider purchasing GBP/USD put options that expire after the December 10 Fed meeting to take advantage of this trend. Alternatively, selling out-of-the-money call spreads could be a safer way to earn income while maintaining a bearish outlook. This situation resembles the “insurance cuts” by the Fed in 2019, but with one key difference: today’s persistent inflation. Back then, low inflation allowed the Fed to ease without worry. Today’s price pressures mean that another rate cut in December is not guaranteed, and we should adjust our trading strategies accordingly. Create your live VT Markets account and start trading now.

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