The GBP/USD pair dropped to about 1.3330 during Thursday’s Asian trading hours as demand for the US Dollar rose. This decline happened after the pair approached a two-month high. However, expectations of a Federal Reserve rate cut next week might limit further drops. Traders are paying close attention to the US Initial Jobless Claims report for more insights. Recent weak US economic data, including the Manufacturing PMI and ADP Employment Change, has increased the likelihood of a rate cut by the Federal Reserve at their December meeting. This could put pressure on the US Dollar, which may help the GBP/USD pair.

Market Speculation on Fed Policy

On Wednesday, the GBP/USD pair climbed above 1.3300 as speculation grew about Kevin Hassett possibly becoming the next Federal Reserve Chair, leading to expectations of a more lenient Fed policy. This speculation caused the US Dollar to drop after President Donald Trump’s comments about a “potential” Fed Chair during a press conference. The US ISM Services PMI indicated steady activity in November, recording a score of 52.6, up from 52.4. It was anticipated to be 52.1. While the index did expand, new orders slowed, and employment remained low, coupled with rising input prices. Reflecting back on late 2019, weak US manufacturing and employment data led to strong bets on the Federal Reserve changing its policy. This pattern made pairs like GBP/USD sensitive to rumors and news. Historically, it shows how swiftly expectations for rate cuts can weaken the dollar. Currently, we see similar trends, with recent data revealing that US inflation cooled to 2.8%. Additionally, the latest Non-Farm Payrolls report showed an increase of just 150,000 jobs, falling short of forecasts. This has pushed market expectations for a Federal Reserve rate cut in the first quarter of 2026 to over 70%, according to the CME FedWatch Tool. Consequently, the dollar has weakened, which may support GBP/USD in the short term.

Strategizing for Potential Volatility

Given the high expectations but uncertain outcomes, we should prepare for volatility around the next Fed announcement. In December 2019, the Fed kept rates steady, which surprised many and led to a swift reversal. Buying options for straddles on GBP/USD could be a good strategy to benefit from significant price movements in either direction. We must also consider the UK situation, as the difference in policies is significant. Recent data from the Office for National Statistics indicates UK inflation remains steady at 3.5%, prompting the Bank of England to take a more hawkish stance compared to the Fed. This fundamental difference might give the pound a continued boost against the dollar in the coming weeks. Create your live VT Markets account and start trading now.

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