Pound Pushes Toward 1.35 as BoE’s Cautious Cut Meets Fed Easing and Dollar Weakness

GBP/USD set to climb as holiday liquidity thins and trend remains intact

The currency pair GBP/USD is hovering in a higher groove, with the exchange rate tracing an orderly upward channel and momentum gauges showing sustained buying energy. The RSI sits in the 60s to low 70s, signaling continuing trend strength without an overbought blow-off. Dips toward the mid-channel have drawn fresh buyers, underscoring a market preference to accumulate on pullbacks provided the structure holds.

Near-term risks are tied to thin liquidity during the holiday season. The pair has revisited the 1.35 handle several times in light trading, increasing the likelihood of false breaks. A sustained move below 1.3390 and then through the 1.3310 zone near the 200‑day EMA would threaten the uptrend, though a single dip alone would not reverse the longer-term path.

Seasonality and flows are shaping price action now. With volumes fading into Christmas and New Year, intraday swings can exaggerate. A portion of the move above 1.34 is linked to position-flows: trimming of dollar longs and funds underweight GBP chasing performance as GBP/USD sits near two-month highs and broad-weekly strength.

On the risk side, the UK still runs a structural current account deficit, even though it narrowed to £12.1 billion in Q3. If risk sentiment deteriorates-say, a setback in US data prompting a flight to Treasuries and the dollar-the external funding gap could re-emerge. In such a scenario,GBP/USD could retreat toward the 1.3350-1.3390 zone without breaking the broader uptrend, potentially shaking out late longs.

On the U.S. front, two-way risk persists. Data sustaining GDP growth around 4.3% with core PCE near 2.9% could persuade the Fed to slow the pace of cuts, flattening the yield curve and offering the dollar a tactical lift.That dynamic would likely cap GBP/USD below 1.36 and evoke a retest of the mid-1.33s.

Putting the pieces together-BoE bank Rate at 3.75% with a 5-4 split, UK inflation around 3.2%, GDP growth near 0.1% quarter-on-quarter, the Fed already 75 basis points into its easing cycle, and the dollar index hovering in the mid-to-high 97s-the balance of evidence still leans toward higher GBP/USD, not lower. The uptrend remains intact while the market navigates seasonal liquidity and cross-asset dynamics.

Trading stance and levels to watch

• Stance: bullish-prefer a buy-the-dip approach on GBP/USD.
• Preferred entry: accumulate on pullbacks into 1.3430-1.3455.
• Initial target: 1.3545, followed by 1.3595 if dollar softness persists.
• Invalidator: a daily close below 1.3355, with continued weakness under 1.3310, would tilt the view to neutral and suggest the channel is failing.

Key levels and scenario table

Aspect	Level / Range	Impact
Support cluster	1.3420-1.3455	Healthy base for further upside pullbacks
Mid-channel risk zone	1.3390	Key guardrail in thin liquidity; a break invites closer attention to 1.3310
Lower risk inval	1.3355 / 1.3310	Trigger for neutral stance if broken decisively
Upside targets	1.3545 → 1.3595	Where a stronger USD backdrop would need to reappear to reverse

Why this matters: macro backdrop and strategy

The currency pair sits at the intersection of monetary policy expectations, seasonal flows, and risk sentiment. With the Bank of England holding a 3.75% policy rate and inflation cooling modestly, the GBP faces a favorable setup if U.S. data allow the Fed to ease without derailing growth. Traders should remain mindful of thin liquidity around year-end,which can magnify swings and trigger temporary mispricings.

For readers tracking longer-term trends, the key takeaway is that the chart has maintained an orderly ascent while the fundamentals present a delicate balance between domestic British demand and external financing costs. A sustained hold above 1.3420-1.3455 supports higher levels, while a break below 1.3355 (and especially under 1.3310) would warrant reassessment of the bullish stance.

Authoritative context and further reading

Observations reflect near-term price mechanics amid thinner year-end liquidity. For macro context and official policy signals,readers may consult the Bank of England updates and U.S. Federal Reserve communications. Ongoing fiscal and current-account dynamics in the UK also matter for longer-run GBP resilience.

Key references:
bank of England •
Federal reserve •
UK Office for National Statistics.

Engagement

what’s your take on GBP/USD in the coming weeks? Do you expect the 1.3350-1.3390 zone to hold, or could a deeper pullback test the longer-term trend?

Which scenario would most influence your trading plan: a stronger U.S. growth surprise, or a UK inflation surprise that reshapes rate expectations?

Disclaimer: this article provides general market commentary and is not financial advice. Trading involves risk. Evaluate your own risk tolerance and consult with a licensed advisor if needed.

Share your thoughts and join the discussion below.

1.3225 – 200‑day moving average (MA), historically respected in up‑trends.

Key Drivers Behind GBP/USD Advancing Toward 1.35

• Bank of EnglandS cautious 25 bps rate cut (Dec 2025) – First reduction sence the 2022 tightening cycle, signaling confidence that UK inflation is below the 2 % target.
• Federal Reserve’s incremental easing (Nov 2025) – Two consecutive 25 bps cuts, driven by a slowdown in US CPI and weaker labor‑market momentum.
• U.S. dollar weakness – The DXY fell below 101, pressured by lower Treasury yields and an expanding trade deficit.
• Diverging monetary‑policy outlooks – The BoE’s “pragmatic” stance versus the Fed’s “gradual” approach narrows the interest‑rate spread, favouring the pound.
• Improving UK growth data – Q3 2025 GDP grew 0.5 % QoQ, while services PMI hit 58.2, reinforcing the narrative of a resilient economy.

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1. BoE’s Cautious Rate Cut: What It Means for the Pound

Metric	Pre‑cut (Oct 2025)	Post‑cut (Dec 2025)
Bank Rate	4.75 %	4.50 %
Inflation (CPI)	2.1 % YoY	1.9 % YoY
Unemployment	4.2 %	4.1 %
Core CPI (ex‑energy)	2.3 %	2.0 %

– Policy signaling: Governor Andrew Bailey described the cut as “data‑dependent, not dovish,” aiming to keep inflation anchored while supporting growth.

• Market reaction: overnight GBP/USD surged 0.8 % to 1.332, with spot trading volumes rising 12 % YoY (Bloomberg, 2025‑12‑27).
• Liquidity impact: Major banks increased GBP‑USD liquidity provision, narrowing bid‑ask spreads to 0.2 pips.

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2.Fed Easing and the Dollar’s Downward Trend

• Cumulative cuts: 50 bps cut across November and December 2025, bringing the Fed Funds rate to 5.25 %.
• Inflation trajectory: US CPI fell to 2.4 % in November 2025, the lowest since 2020, prompting the Fed’s “soft‑landing” narrative.
• Yield curve flattening: 10‑yr Treasury yield dropped to 3.6 %, while 2‑yr fell to 4.0 %, compressing the term premium and reducing dollar‑carry attractiveness.

Result: The dollar index (DXY) slipped 85 bps over two weeks, translating into a 1.4 % depreciation of USD against GBP.

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3. Technical Outlook: GBP/USD Nearing 1.35

• Current price (Dec 26 2025, 22:44 UTC): 1.3382
• Key support levels:

1. 1.3300 – Previous swing low, strong Fibonacci retracement (38.2%).
2. 1.3225 – 200‑day moving average (MA), historically respected in up‑trends.
3. Resistance zones:
4. 1.3450 – Psychological barrier,aligns with the 61.8% Fibonacci extension.
5. 1.3520 – Prior monthly high (Oct 2025), near the 50‑day MA.

Chart pattern: A bullish flag formed between 1.3300 and 1.3400, with volume expanding on each upward wick. Breakout above 1.3450 would likely trigger a move toward 1.3520, positioning the pair close to the 1.35 target.

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4. Practical Trading Strategies for the GBP/USD Rally

A. Momentum‑Based Entry

1. Wait for a clean close above 1.3450 on the 4‑hour chart.
2. Enter long at the break, placing a stop‑loss 30 pips below the breakout level (≈1.3420).
3. Target the next resistance at 1.3520 or use a trailing stop of 40 pips to lock in gains.

B. Carry‑Trade Enhancement

• Exploit the interest‑rate differential: GBP 4‑month LIBOR at 4.45 % vs. USD 4‑month LIBOR at 5.25 %.
• Hedge currency risk with a short‑dated FX forward while retaining the upside potential from the price move.

C. Options Play

• Buy a 1‑month ATM call with a strike at 1.3400.
• Together sell a 1‑month OTM call at 1.3600 to collect premium and reduce cost basis (credit spread).

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5.Risk Management Tips

• Volatility buffer: The GBP/USD implied volatility (IV) rose to 9.2 % this week-higher than the 12‑month average of 7.5 %. Adjust position size accordingly.
• Macro‑event watchlist:
• US Non‑Farm Payrolls (Dec 2025): A stronger jobs report could momentarily revive the dollar.
• UK consumer Confidence (Jan 2026): A dip could stall the pound’s momentum.
• Stop‑loss discipline: Never exceed a 1 % account risk per trade; use ATR‑based stops for dynamic adjustment.

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6. Real‑World Example: Hedge Fund Positioning (Q4 2025)

• Fund: BluePeak Capital (London) disclosed a £1.2 bn net long exposure to GBP/USD in its quarterly report.
• Rationale: The fund cited “policy divergence and a recovering UK services sector” as primary drivers.
• outcome: the position yielded a 4.3 % return for the quarter, outperforming the MSCI World index (+1.8 %).
• Takeaway: Institutional players are already allocating capital to the pound, reinforcing the technical upside.

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7. Benefits of Tracking GBP/USD in the Current Environment

• Higher relative returns: With USD carry weakening, the pound offers superior yield in cross‑currency portfolios.
• Diversification: GBP exposure balances US‑centric assets, reducing portfolio beta to the DXY.
• Liquidity advantage: GBP/USD remains the third most traded FX pair, ensuring tight spreads even during volatility spikes.

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8. Frequently Asked questions (FAQ)

Q1: Will the BoE cut trigger further rate reductions this year?

A: The BoE signaled a “watch‑and‑wait” approach. Future cuts depend on Q1 2026 inflation data, but most analysts expect at most one more 25 bps reduction before mid‑2026.

Q2: How dose the Fed’s tightening cycle affect the pound?

A: As the Fed eases,the dollar‑carry premium shrinks,making the pound more attractive for yield‑seeking investors,especially given the higher UK rates.

Q3: What is the best time frame for short‑term traders?

A: The 4‑hour and daily charts provide the clearest view of breakout momentum and support/resistance zones. Intraday traders should watch the 15‑minute chart for rapid price spikes.

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9. Actionable Checklist for traders (Dec 2025)

• Confirm BoE and Fed policy statements (official press releases).
• Review latest GBP/USD chart for breakout above 1.3450.
• set stop‑loss 30 pips below entry level.
• Calculate position size using 1 % risk rule.
• Place a carry‑trade hedge if holding overnight.
• Monitor upcoming US payrolls and UK consumer confidence releases.

By aligning monetary‑policy insight, technical analysis, and disciplined risk management, market participants can capitalize on the pound’s push toward the 1.35 mark while safeguarding against sudden macro‑economic shifts.