The GBP/USD pair is stronger at around 1.3425 during the Asian session, thanks to positive UK PMI data. The UK Composite PMI hit 52.1, beating the expected 51.4. The services PMI and manufacturing PMI were 52.1 and 51.2, both above forecasts. However, a potential interest rate cut by the Bank of England (BoE) on Thursday could limit the GBP’s growth. The market expects the BoE to lower its key rate by 25 points to 3.75% in December.

Federal Reserve Monetary Policy

Federal Reserve officials have mixed views on future interest rate cuts. While one cut is predicted for 2026, some policymakers do not expect more. Traders are anticipating two rate cuts next year, with Fed funds futures suggesting a 75.6% chance that rates will remain the same at the next meeting in January. The Pound Sterling, the UK’s official currency, plays a vital role in foreign exchange markets. Its value heavily depends on the Bank of England’s monetary policy and various economic indicators. A positive trade balance can strengthen the currency, while a negative balance might weaken it. Currently, with GBP/USD at about 1.3425, we see the recent strength from positive UK PMI data as a short-term boost. The real test comes tomorrow with the BoE’s interest rate decision. Any gains made today are likely to be unstable leading up to this event. A 25 basis point cut by the BoE is widely expected, already factored into the market. Thus, the pound’s movement will depend on the bank’s future guidance on rate cuts. If the bank suggests a quicker easing cycle for 2026, it could wipe out the recent optimism from the PMI data.

GBP/USD Trading Strategy

This expected rate cut aligns with recent economic data showing UK inflation dropped to 2.8% in November, down from 3.6% in September 2025. With nearly flat GDP growth in the third quarter, the BoE has a clear path to ease policies. If the bank signals more cuts are coming, GBP/USD might test support levels around 1.3300. Given this risk, we’ve noticed an increase in implied volatility for short-term GBP/USD options this week. A solid strategy for traders could be to buy straddles to make the most of any significant price change, whether the BoE’s statement is more hawkish or dovish than expected. This strategy allows traders to profit from uncertainty. On the other hand, the US dollar’s situation is different. Markets believe there’s a high chance the Federal Reserve will keep rates steady in January 2026. The key conflict is that traders expect two Fed rate cuts next year, while the central bank only anticipates one. This gap between market expectations and Fed forecasts could lead to volatility for the dollar. We have seen similar policy differences in the past, especially during 2017-2018 when the market often challenged the Fed’s rate predictions. If US economic data stays strong, markets may have to adjust their expectations, which would support the US dollar. This could create more challenges for the GBP/USD pair, especially if the BoE starts a sustained rate-cutting cycle. Create your live VT Markets account and start trading now.

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