The GBP/USD rose to a seven-week high, hitting the 1.3400 mark, after the US Federal Reserve made its third interest rate cut in a row. Fed Chair Jerome Powell offered some cautious comments, but global markets remained steady. Traders now expect more rate cuts in the next two years than what the Fed predicts. While the Fed only forecasts one rate cut next year, Powell’s indication that rate hikes are unlikely gave traders confidence. Futures markets quickly adjusted, anticipating two or more cuts by 2026. Stocks did well because the Fed’s decision met expectations, which boosted market confidence. Next week has few major economic events, but significant UK data will be released starting Tuesday. This includes UK labor statistics, the Purchasing Managers Index (PMI), Consumer Price Index (CPI) figures, and the Bank of England’s interest rate decision. UK Retail Sales will round out the releases on Friday. The Pound Sterling, the UK’s official currency and the fourth most traded in the world, is heavily affected by the Bank of England’s monetary policy. Economic indicators like GDP, Manufacturing PMIs, and trade balance reports significantly influence its value, impacting foreign investment and interest rate possibilities. After the Federal Reserve’s recent rate cut, GBP/USD has climbed to around 1.3400. The Fed is signaling a pause in rate changes, but futures markets are already betting on at least two more cuts by 2026. This dovish approach from the U.S. weakens the dollar and strengthens the pound. Our current focus is on the growing gap between the Fed’s and the Bank of England’s policies. Recent data shows UK inflation holding steady at 4.0% in November 2025, double the BoE’s target. This situation makes it hard for the BoE to consider rate cuts next week, particularly compared to the U.S., where inflation has decreased to 3.1%. This sets the stage for potential volatility as important UK data is set to release next week. We’ll track labor statistics and PMI surveys on Tuesday, followed by the critical CPI inflation report on Wednesday. The big event will be the Bank of England’s interest rate decision on Thursday, which may highlight this policy divide. For derivative traders, a rise in implied volatility for GBP/USD options is likely. Given the uncertainty around the BoE’s stance, strategies like buying straddles or strangles might work well for betting on significant price movements. The current rally could either strengthen or quickly reverse based on next week’s results. If we think the UK economy is strong enough for the BoE to stay hawkish, then long GBP/USD futures positions may be a good idea. Recent purchasing managers’ surveys revealed an unexpected rise to 53.8, suggesting economic growth that supports a stronger pound. However, any unexpected weakness in upcoming data could quickly reverse the recent gains. Looking back at 2016-2018, we saw how different central bank policies created a lasting trend in Cable. We might be entering a similar situation now, but we should remember that the market has already priced in a hawkish BoE. Any indication that the BoE is worried about growth could lead to a significant unwinding of these positions.

here to set up a live account on VT Markets now