GBP/USD is currently trading around 1.3150 after UK Chancellor Rachel Reeves canceled planned income tax increases. This decision has raised concerns about the UK’s financial future, even though the budget deficit forecast has been lowered to £20 billion. Reeves is choosing to focus on changing tax thresholds and reforming salary sacrifice instead of implementing big tax hikes. The British Pound is under pressure due to weaker economic data, making a Bank of England rate cut in December more likely. The UK economy showed only slight growth in the third quarter, with a decline in GDP in September. Key reports on inflation and early PMI readings for manufacturing and services sectors are expected this week.

US Dollar Outlook

On the other hand, the US Dollar remains steady as traders await delayed US economic data after the government’s reopening. The chance of a Federal Reserve rate cut in December has dropped from 62% to 43%. Governor Christopher Waller has voiced worries about the labor market and a slowdown in hiring, indicating the Fed should contemplate a rate cut. The British Pound, the world’s oldest currency, makes up 12% of global foreign exchange transactions. Its value is notably influenced by economic data and the Bank of England’s monetary policy, with interest rates being a key tool for ensuring price stability. The British Pound is facing difficulties as there’s a widening gap between UK fiscal and monetary policies. Chancellor Reeves’s choice to cancel tax hikes raises doubts about future budget plans, putting additional strain on the currency. This fiscal uncertainty, along with soft economic data, supports the view that the Bank of England is likely to cut interest rates in December.

UK Inflation and Market Expectations

UK inflation data from October 2025, released last week, showed a cooling trend, with the headline CPI dropping to 2.1%, just above the Bank’s target. This has strengthened market expectations for a rate cut, with derivatives now suggesting an 85% chance of a 25-basis point reduction at the December meeting. These factors create a strong bearish outlook for the Pound Sterling in the coming weeks. In contrast, the situation for the US Dollar is less certain, pointing to potential volatility. Although the likelihood of a December Fed rate cut has decreased, Governor Waller’s recent remarks suggest otherwise, creating confusion. Buying GBP/USD put options seems like a smart strategy, allowing traders to profit from a possible decline in the pair while managing risk ahead of delayed US data. The market turmoil in late 2022, when unfunded fiscal plans led to a swift sell-off in the Pound, is still fresh in our minds. Although the current scenario is not as severe, that incident highlighted investors’ sensitivity to UK fiscal credibility. This history likely contributes to the Pound’s current weakness, reinforcing a cautious bearish outlook. Create your live VT Markets account and start trading now.

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