The GBP/USD pair is gathering strength to around 1.3480 during the early Asian session on Friday. Expectations of interest rate cuts by the US Federal Reserve (Fed) this year are weighing on the US dollar (USD) against the British pound (GBP). Philadelphia Fed President Anna Paulson is scheduled to speak later over the weekend.
The dollar ended 2025 with its biggest annual decline in eight years. With interest rates expected to be cut at least twice this year, the Fed’s policy path is deviating from the UK, reducing the appeal of the US dollar. Financial markets expect a roughly 15.0% chance that the Federal Reserve will cut interest rates at its next meeting in January, according to the CME FedWatch tool.
Moreover, expectations that US President Donald Trump will appoint a dovish successor to Fed Chairman Jerome Powell, whose term ends this year, may contribute to the downward trend of the US dollar. Trump has stated that he expects the next Fed chairman to keep interest rates low and never “disagree” with him. These comments are likely to increase concerns among investors and policymakers about the Fed’s independence.
On the other hand, the Bank of England (BoE) expects interest rates to continue on a gradual downward path, providing some support to the pound. The British central bank cut interest rates from 4.0% to 3.75% at its December policy meeting, the lowest level in nearly three years. Interest rates are likely to continue on a gradual downward path, but “how far we go becomes a closer decision” with each cut, Governor Andrew Bailey said during the news conference.
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.
