The GBP/USD pair rose after opening a bearish gap, trading around the 1.3510 level during Asian business hours on Monday. The pair is rising as the US Dollar (USD) faces challenges, which can be attributed to growing expectations of two additional interest rate cuts by the Federal Reserve (Fed) in 2026.
Traders will likely focus on the minutes from the December Federal Open Market Committee (FOMC) meeting scheduled for Tuesday, which may shed light on the domestic policy discussions shaping the Fed’s 2026 outlook.
The US central bank cut the federal funds rate by 25 basis points at its December meeting, bringing the target range to 3.50%-3.75%. The Fed cut cumulative interest rates by 75 basis points in 2025 amid a cool labor market and still-high inflation.
The CME FedWatch tool shows an 81.7% probability of holding interest rates at the Fed’s January meeting, up from 77.9% the week before. Meanwhile, the probability of a 25 basis point rate cut fell to 18.3% from 22.1% a week ago.
The latest weekly US labor market data sent mixed signals. Initial jobless claims fell to 214,000 from 224,000 the previous week, beating market expectations of 223,000. Meanwhile, continuing unemployment claims rose to 1.923 million from 1.885 million, while the four-week average initial claims fell to 216.75 thousand from 217.5 thousand.
The Bank of England cut interest rates by 25 basis points to 3.75% in December, with a close 5-4 vote highlighting persistent concerns about inflation. While inflation slowed to 3.2% in November, it remains well above the Bank of England’s 2% target. UK GDP expanded 0.1% in the third quarter, matching expectations, but the Bank of England expects flat growth in the final quarter.
Bank of England Governor Andrew Bailey indicated that interest rates are expected to fall further in a gradual manner, but warned that the scope for further cuts is limited as interest rates approach their neutral level. Any moves beyond the recent cut are likely to be well balanced and strongly driven by incoming data.
Frequently asked questions about the pound sterling
The British Pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most popular foreign exchange (FX) trading unit in the world, accounting for 12% of all transactions, averaging $630 billion per day, according to data for 2022. The main trading pairs are GBP/USD, also known as “Cable”, which accounts for 11% of FX, GBP/JPY, or “Dragon” as traders know it (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
The single most important factor affecting the value of the pound sterling is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on whether it has achieved its primary objective of “price stability” – a stable inflation rate of around 2%. The primary tool for achieving this is adjusting interest rates. When inflation is too high, the Bank of England will try to rein it in by raising interest rates, making it more expensive for individuals and businesses to obtain credit. This is generally positive for the pound, as higher interest rates make the UK a more attractive place for global investors to put their money. When inflation falls to a very low level, it is a sign that economic growth is slowing. In this scenario, the Bank of England would consider lowering interest rates to reduce the cost of credit so that companies borrow more to invest in growth-generating projects.
Data releases measure the health of the economy and can affect the value of the British pound. Indicators such as GDP, manufacturing PMIs, services and employment can all influence the direction of the pound. A strong economy is good for the pound. Not only does it attract more foreign investment, but it may encourage the Bank of England to raise interest rates, which will directly strengthen sterling. Otherwise, if economic data is weak, the British pound is likely to fall.
Another important data release for the British Pound is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports during a certain period. If a country produces highly sought-after exports, its currency will take full advantage of the additional demand generated by foreign buyers seeking to purchase these goods. Therefore, a positive net trade balance strengthens the currency and vice versa for a negative balance.
