The US Dollar Index is going down, helping GBP/USD as traders wait for the Federal Reserve’s decision on interest rates. The UK economy seems to be improving after the Autumn Budget, but a rate cut from the Bank of England is anticipated. Technical analysis shows GBP/USD is testing important moving averages that could lead to gains. During the North American session, the Pound Sterling is gaining strength while the US Dollar weakens due to expectations of a Federal Reserve rate cut. GBP/USD is currently trading at 1.3336 and has bounced back from a low of 1.3296.

Markets Awaiting Federal Reserve Decision

Markets are quiet as they await the Federal Reserve’s decision. The US Dollar Index, which compares the dollar’s value to six other currencies, has dropped 0.21% to 99.03. With recent US data showing mixed signals—inflation has stopped rising, jobless claims remain stable, and job vacancies are up according to the JOLTS report—the outlook is unclear. In the UK, the Autumn Budget has led to positive market reactions, and flash PMIs suggest an improved economic situation. However, there is a 92% chance that the Bank of England will cut rates by 25 basis points in December, with another cut likely in 2026. Traders expect a “hawkish cut” from the Fed, which means they might lower rates but project a slow easing pace for 2026. GBP/USD is showing neutral to positive trends, with support levels at 1.3300, 1.3255, and 1.3210. The British Pound is also gaining strength against the Japanese Yen. Both the Federal Reserve and the Bank of England are expected to signal rate cuts this month, complicating the outlook for GBP/USD. The immediate reaction will depend on which central bank seems more committed to easing policies into 2026. Attention will focus more on future guidance than on the cuts themselves.

Economic Projections and Market Strategies

The market has already priced in a 25 basis point cut from the Fed, so the actual decision is less significant than the updated economic projections. The latest Core PCE inflation reading for October remained at 2.8%, above the Fed’s target. This suggests a “hawkish cut,” where rates might be lowered while indicating a slower pace of easing for 2026. Similarly, futures markets show a 92% chance of a Bank of England rate cut next week, despite recent improvements in UK flash PMIs. The latest inflation data for the UK is at 3.5%, indicating that a rate cut might reflect the BoE’s priority on stimulating growth rather than fighting lingering inflation. This dovish shift could limit any significant gains for the Pound Sterling. For those trading derivatives, high implied volatility in short-term GBP/USD options before these two meetings creates an opportunity. One strategy could be to sell volatility through short straddles or strangles after the announcements. Historically, looking at similar central bank cycles like in 2019, implied volatility tends to drop sharply once uncertainty is resolved. The spot price is currently testing the 200-day moving average at around 1.3333, which is an important technical level. We might consider selling call options with strike prices above the 1.3400 resistance level to take advantage of a limited upside. On the other hand, buying put options with strikes below 1.3300 could be a way to hedge against a surprisingly hawkish Fed statement that could drive the pair lower. Create your live VT Markets account and start trading now.

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