The GBP/USD pair is showing strength, trading around 1.3510 in the early European session. The Pound is gaining against the US Dollar as the Bank of England plans to ease monetary policy gradually in 2026. Recently, the UK central bank lowered the interest rate to 3.75%. Further cuts are unlikely due to ongoing inflation. Money markets expect at least one rate cut from the BoE in the first half of the year, with nearly a 50% chance of a second cut by the end of the year. The GBP/USD increased by about 0.45% on Tuesday due to a decline in global US Dollar flows.

US Dollar Weakness

The US Dollar weakened amidst low trading volume and expectations of Federal Reserve rate cuts in 2026, even with strong economic data. The US GDP grew unexpectedly by 4.3% in Q3, but this did not stop the Pound from achieving its highest value against the Dollar in 12 weeks. The market expects the Fed to keep its current stance in January but may resume cuts later in the year. The British Pound lost some gains against the US Dollar after mixed economic data from the US. The GBP/USD is currently around 1.3478, down slightly from its peak of 1.3518, as the US economy performed better than expected. With the GBP/USD strong at the 1.35 level, there is a clear opportunity due to differing central bank policies. The Bank of England is taking a slow and careful approach to rate cuts, which should support the Pound. In contrast, the market is anticipating at least two rate cuts from the Federal Reserve in 2026, putting pressure on the US Dollar. This policy divergence is highlighted by recent inflation data. The latest UK Consumer Price Index (CPI) for November 2025 showed inflation stubbornly at 3.1%, which explains the BoE’s cautious stance. Meanwhile, the US Personal Consumption Expenditures (PCE) Price Index, which the Fed prefers, dropped to 2.4%, giving the Fed more room to lower rates.

Trading Strategy for GBP/USD

In the upcoming weeks, buying GBP/USD call options seems like a simple way to take advantage of potential gains. The Cboe British Pound Volatility Index is near its 2025 lows during this holiday period, making options relatively inexpensive. This is a cost-effective strategy to position for a possible rise to the 1.3600 level in January 2026. Others share this outlook, as speculative trading positions indicate bullish sentiment. The latest CFTC data from mid-December 2025 shows that net long positions on the British Pound rose for the third consecutive week, a notable shift from the mixed positioning seen throughout most of 2025. However, it’s important to stay cautious during holiday trading, which can be unpredictable, as evidenced by the Dollar’s quick bounce after strong Q3 GDP figures. For traders looking to manage risk, a bull call spread on GBP/USD is a good alternative. This strategy allows for profit from an increase in the pair while controlling risk and minimizing initial costs. Create your live VT Markets account and start trading now.

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