The Pound Sterling is stable against major currencies, trading around 1.3500 against the US Dollar as the year wraps up. It remains steady because people expect the Bank of England to start moderate interest rate cuts in 2026. The Bank of England is not likely to cut interest rates significantly since UK inflation is still above the 2% target. In November, inflation decreased to 3.2% year-on-year, down from 3.8% in the July-September period.

Current Trade Outlook

The Pound Sterling has a flat trade outlook, with low trading activity expected due to the upcoming New Year holiday. Today, the GBP is performing strongest against the New Zealand Dollar. People believe the Federal Reserve will cut interest rates by 50 basis points in 2026, contrary to earlier predictions of only one cut. This raise in expectations suggests a more lenient monetary policy with the Fed’s new leadership. In technical terms, GBP/USD is above the 20-day Exponential Moving Average at 1.3488, signaling an upward trend. A break above the 61.8% retracement at 1.3495 could push the price toward 1.3626. As of December 29, 2025, the Pound is stable against the Dollar at around 1.3500. Current trading is thin due to holiday conditions, leading to low liquidity. This quiet period can be misleading, as minor trades could lead to larger price movements.

Monetary Policy Expectations

The Bank of England has a clear outlook, with expectations of only moderate rate cuts in 2026. With inflation at 3.2% in November 2025, the central bank is likely to be cautious, as observed during the 2023-2024 timeframe when UK inflation was more persistent than in other G7 countries. This steady approach from the BoE should support the Sterling. The biggest opportunity lies with the US Dollar, where there’s a significant gap between what the market expects and the official stance. The market is anticipating at least two rate cuts by the Federal Reserve in 2026, while the Fed projects just one. This discrepancy is likely to fuel trends and is currently putting pressure on the Dollar. Given the expected rise in GBP/USD but uncertainty around timing, buying call options makes sense. This strategy allows us to benefit from a possible move above the key 1.3500 level while limiting risk to the premium paid. With quiet year-end markets, implied volatility on these options may offer a good entry point. We need to be cautious about liquidity during the week between Christmas and New Year’s. Historically, this time can see sudden price changes on low volume, similar to the currency “flash crash” in early January 2019. Any leveraged positions should be managed carefully until trading volumes normalize. Everyone is watching for this Tuesday’s FOMC minutes. These notes will give us the first real indication of whether the Fed aligns more with the market’s dovish view or its own hawkish forecasts. A dovish tone could drive GBP/USD towards the 1.3626 target. Create your live VT Markets account and start trading now.

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