The Pound Sterling (GBP) has risen against major currencies after the Bank of England (BoE) cut interest rates by 25 basis points, bringing them down to 3.75%. This is the fourth rate cut this year, driven by a slow job market, economic shrinkage, and low inflation pressures. The UK’s GDP decreased by 0.1% in October, marking a decline for several consecutive months since June. Recent labor market data reveals 17,000 job losses and an increase in the unemployment rate to 5.1%, the highest level in nearly five years. In November, inflation saw a slight rise, with the headline CPI increasing by 3.2% year-over-year and a drop in the core inflation rate to 3.2%.

Market Reactions

After the BoE’s decision, GBP/USD approached 1.3400, while the US Dollar Index increased by 0.15%. Upcoming US CPI data could impact the Federal Reserve’s (Fed) monetary policy, especially since inflation pressures continue. Currently, there is a 24.4% chance of a 25 basis point rate cut at the Fed’s January meeting. The BoE controls the UK’s monetary policy, aiming for a 2% inflation target by adjusting interest rates. Higher rates attract global investments and strengthen the GBP, while lower rates are intended to boost economic growth. In extreme cases, the BoE might use Quantitative Easing, which could weaken the GBP, whereas Quantitative Tightening generally strengthens it. On December 18th, 2025, the BoE lowered rates to 3.75%, yet the Pound gained strength against the dollar. This suggests the market had anticipated the cut. The narrow 5-4 vote demonstrates uncertainty about future easing, which will influence our strategies in the coming weeks. Economic conditions remain weak, supporting the likelihood of more cuts from the BoE in early 2026. For example, the latest CBI Distributive Trades Survey showed a reading of -25, indicating the largest drop in retail sales in over a year. This weakness suggests the BoE may have to take further action despite internal disagreements.

Impact of US Monetary Policy

Meanwhile, US CPI data released after the BoE’s decision was slightly higher than expected at a 3.2% annual rate. This supports the cautious stance of Fed officials and makes a Fed rate cut in January 2026 less certain. The difference in monetary policies between a dovish BoE and a hesitant Fed is a key focus now. For derivative traders, this environment indicates increased volatility in GBP/USD. One-month implied volatility for the pair has risen to 8.5%, up from around 7% last month. Buying straddles or strangles could be an effective strategy to profit from a significant price move in either direction as the market adjusts to this policy divergence. Despite the pound’s rise to 1.3400, the underlying economic weakness in the UK suggests this uptick might not last. We should look into options to establish bearish positions or hedge long sterling exposure. Buying put options on GBP/USD provides a way to manage risk with a defined loss potential while positioning for a possible drop back toward the 1.3000 level observed in autumn 2025. The upcoming announcement of the next Federal Reserve Chair adds more unpredictability. If a dovish nominee is chosen, it could weaken the US Dollar and push GBP/USD higher, contrary to economic fundamentals. This political risk supports the use of options to handle potential sharp, unexpected movements in the currency pair. Create your live VT Markets account and start trading now.

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