The GBP/USD pair is currently fluctuating between 1.3470 and 1.3518 following a two-day surge that brought it to its peak levels since early October, nearing a 12-week high. Buyers stepped in aggressively after the Bank of England moved Bank Rate down by 25 bps to 3.75%. However, a narrow 5–4 split vote and persistent inflation at 3.2% YoY prevented the move from appearing as a classic dovish pivot. Four of nine policymakers declined to implement a cut, indicating they continue to perceive wage and price pressures as uncomfortably elevated. The combination of a small cut, a divided committee, and inflation remaining 1.2 percentage points above the 2% target leads the market to interpret the BoE’s stance as “easing, but reluctantly.” The outcome indicates that GBP has not been regarded as a funding currency. GBP/USD buyers are confidently driving the pair above 1.3400, with spot trading currently between 1.3450 and 1.3480 after reaching an intraday high of 1.3518 and testing earlier support at 1.3374.
On the macro side, the UK is not posting strong data, but it is avoiding outright stagnation for now. Third-quarter GDP showed a growth of 0.1% QoQ and 1.3% YoY, precisely matching expectations. A minor downward adjustment of Q2 growth from 0.2% to 0.1% was balanced by an upward revision to 2024 data, maintaining the year-on-year rate at 1.3%. This reflects weak growth rather than a surge, and the Bank of England’s forecasts continue to suggest that activity “comes close to stalling” in late 2025 due to stricter financial conditions and the recent Budget impacting confidence. The weak backdrop limits the potential for GBP/USD to advance solely based on domestic strength. Simultaneously, the UK current account deficit decreased from approximately £21.2bn in Q2 to £12.1bn in Q3, remaining substantial but less severe. For a currency that traditionally relies on foreign capital inflows to cover a structural external gap, a smaller deficit alleviates some of the worst-case tail risk for GBP. However, it does not alter the fact that the Pound continues to be susceptible if global risk appetite diminishes. Markets currently view the 3.75% BoE rate as a stepping stone, rather than the final destination. Inflation has decreased from a recent 3.8% peak to 3.2%, but the Governing body is indicating that inflation is expected to converge to 2% around mid-2026. That leads to a gradual reduction process. Rate markets are anticipating further easing through 2026, though they do not expect a drastic reduction of the Bank Rate. The four dissenters on the Monetary Policy Committee – who opposed the latest cut – serve as a limit on how accommodating the BoE can become in the near term. The “reluctant easing” stance bolsters GBP on crosses and offers a fundamental support for GBP/USD above 1.34, particularly in light of a Federal Reserve that has already reduced rates by 75 bps this year and is facing political pressure for further cuts.
Conversely, the USD is declining. The US Dollar Index has slid into the 97.70–98.10 band, locked inside a clear descending channel with a pattern of lower highs and lower lows. Sellers are maintaining their position in the area of 98.60–98.70, where a descending trend line meets the 50-EMA, while the 200-EMA close to 99.20 limits any further upward movement. The technical structure on the dollar side indicates a clear bearish trend: RSI remains below 45, momentum is in the negative territory, and each rally into resistance is met with selling pressure. Positioning is increasingly tilted toward further USD weakness as the market intensifies its focus on Fed-easing narratives and shifts into gold and high-beta currencies. The macro dollar drag is a key factor behind GBP/USD’s rise toward 1.35, despite the UK’s lackluster growth. The Fed has already implemented 75 bps of cuts this year, and market sentiment suggests skepticism about whether this will be the end of the adjustments. Implied probabilities indicate approximately a 20% likelihood of another reduction in January and about 50% chances of an extra cut by March. Some houses anticipate two additional 25-bp adjustments in 2026 – for instance, one in March and another in June – which would extend the cumulative easing even further. The political landscape is shifting in a similar direction. A new Fed Chair is anticipated, with candidates under consideration seen as more growth-focused and aligning with the administration’s inclination towards a more accommodative policy. This leads investors to anticipate that the future Fed will be more accepting of elevated inflation, which supports a steeper US yield curve and a declining USD in the long run. Overlay this with rising safe-haven flows into gold – with spot surging toward $4,497/oz recently – and it is evident that the dollar is no longer the only defensive asset of choice. When gold rallies and DXY trades under 98, GBP/USD has the potential to maintain elevated levels.
The most recent US dataset presents a balanced view, and the price movement of GBP/USD illustrates this point. Real Q3 GDP registered at 4.3% annualised, surpassing the 3.3% consensus and exceeding the previous estimate of 3.8%. Under the surface, the GDP Price Index accelerated to 3.7% versus a 2.7% forecast, and core PCE in Q3 rose 2.9%, up from 2.6%. Headline PCE inflation registered at 2.8%, an increase from 2.1% in Q2. The data suggests that an emergency cutting cycle from the Fed is unlikely, supporting the USD in achieving temporary counter-trend rallies. That is why GBP/USD has retreated from 1.3518 and is fluctuating between 1.3470 and 1.3480 as market participants analyze the data. However, the activity aspect of the US economy is not as polished. Durable Goods Orders decreased by 2.2% in October, contrary to expectations of a 1.5% decline, following a 0.7% increase in September. Orders excluding defence decreased by 1.5%, while core orders (excluding transportation) increased by just 0.2%, falling short of the 0.3% forecast and significantly slowing from the previous 0.7% growth. Industrial production decreased by 0.1% month-over-month in October and achieved a modest recovery of 0.2% in November. Consumer confidence is showing signs of instability. The Conference Board index fell to 89.1 in December, compared to an expectation of 91.0, while the previous month was significantly revised up to 92.9, highlighting the weakness of the latest figure. The combination of robust past GDP and weakening forward indicators sets a challenging standard for any lasting USD recovery, while providing solid support for GBP/USD dips. The relative policy narrative is just as significant as the absolute rates. With Bank Rate at 3.75% and the Fed already moving lower, the interest-rate gap that previously favoured the USD is closing. Markets currently believe the Fed will ease earlier and more aggressively compared to the BoE. BoE Governor Andrew Bailey has clearly indicated that inflation is expected to be “closer to target” only by mid-2026, which supports the rationale for maintaining tighter policy for an extended period. Conversely, the Fed faces immediate political pressure to establish “easier conditions” ahead of the peak of the US election cycle. For GBP/USD, this indicates that the pair is no longer responding to the previous pattern where any risk-off movement would lead to a significant decline. As long as the BoE maintains a cautious tone and the Fed leans dovish, carry and rate differentials subtly support the currency.