BoE’s Interest Rate Moves

In December, the Bank of England (BoE) lowered interest rates from 4.0% to 3.75%, the lowest level in three years. Governor Andrew Bailey mentioned that rates may drop further, but it’s unclear by how much. Money markets expect at least one rate cut in the first half of the year, with nearly a 50% chance of a second cut before the year ends. As of Tuesday, the GBP/USD exchange rate is 1.3460, down 0.30%. This pair is stabilizing after reaching a three-month high of about 1.3535. There’s uncertainty ahead of the Federal Reserve’s meeting minutes. The US Dollar is stable, with the US Dollar Index around 98.10. The Fed recently cut rates for the third consecutive time, lowering the Federal Funds target range to 3.50% to 3.75%. Projections suggest just one more rate cut next year, intending to bring the policy rate to about 3.4% by 2026. As the year wraps up, trading activity is low, with GBP/USD steady at around 1.2750. This is a significant decline from the earlier 1.3460 level in 2025 when rate cuts were the main topic. The market now paints a very different economic picture.

Volatility And Trading Strategies

The Bank of England once hinted at a “gradual downward path” when rates were at 3.75%. However, UK inflation has stubbornly stayed high, ending the year at 3.9%, forcing the BoE to maintain its base rate at 5.25%. This means that any trading strategies predicting quick rate cuts are likely to fail. The Federal Reserve’s stance has also changed from the earlier expected easing cycle. While US inflation has dropped to 3.1%, the Fed has kept its policy rate steady in the 5.25% to 5.50% range. The earlier expectation of several rate cuts has shifted to a more cautious approach of “higher for longer.” This difference between ongoing UK inflation and a slightly improved outlook in the US, along with stagnant UK GDP growth at -0.1% last quarter, creates a chance for volatility. Traders may want to explore strategies that benefit from sudden price movements, like buying straddles on GBP/USD. This could allow them to profit from a breakout in either direction as central banks set their policies for 2026. Given the UK’s ongoing economic challenges, the pound’s strength against the dollar seems uncertain as we head into the new year. We see a potential opportunity in selling GBP/USD futures contracts in the coming months. This strategy would be profitable if economic pressures continue to impact the pound. Create your live VT Markets account and start trading now.

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