The Pound Sterling recently hit a three-month high of 1.3535 against the US Dollar. This rise is due to expectations that the Federal Reserve will cut interest rates in 2026. Despite the US Gross Domestic Product (GDP) growing by 4.3% in the third quarter, traders still believe the Fed will take a cautious approach. The US Dollar Index fell to an 11-week low of 97.75. Although the Bureau of Economic Analysis reported a 4.3% GDP growth, up from 3.8% in the previous quarter, the markets expect a 70.6% chance of the Federal Reserve cutting rates by at least 50 basis points in 2026, according to the CME FedWatch tool.

Bank of England’s Rate Decision

The Bank of England (BoE) recently lowered interest rates to 3.75% after a close 5:4 vote, following a gradual easing strategy. UK inflation decreased to 3.2% year-on-year in November, raising speculation about more rate cuts in 2026. Currently, the GBP/USD pair is at 1.3513, showing a positive short-term trend. If the pressure on the pair eases, some consolidation may occur, with resistance noted at key Fibonacci retracement levels. The BoE’s decisions, which occur at eight meetings each year, greatly influence how traders view the Pound Sterling. A dovish stance from the BoE generally weakens the currency. As we approach the holidays, the Pound continues to strengthen against the US Dollar, reaching its highest level in three months. This trend is fueled by the belief that the Federal Reserve will cut interest rates more aggressively than the Bank of England in 2026. Despite strong GDP numbers, US core inflation held at 3.5% in October 2025, leading the market to anticipate Fed rate cuts.

US Economic Indicators

Despite the US GDP growth of 4.3% in the third quarter of 2025, the job market appears weak. For instance, the November 2025 Non-Farm Payrolls report showed a modest gain of just 155,000 jobs, indicating a cooling labor market. This softness makes traders wary of betting on the US Dollar’s strength, suggesting that selling into rallies on the DXY futures index may be a good strategy in the coming weeks. On the other hand, the Bank of England remains cautious. It recently voted to cut rates by 25 basis points on December 18, 2025. UK inflation remains high at 3.2%, well above the 2% target, limiting how quickly the BoE can ease its policy. This divergence between the BoE and the Federal Reserve supports bullish positions on the Pound, like buying GBP/USD call options expiring in early 2026. Looking at the charts, we should proceed with caution in the short term. The Relative Strength Index (RSI) is above 70, indicating the Pound’s recent rally may be overextended and might need to pause, particularly with lower trading volumes during the holidays. It would be wise to wait for a dip towards the 1.3400 level to start new long positions or use option spreads to manage risk against a sudden reversal. Create your live VT Markets account and start trading now.

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