GBP/USD Price Forecast - Pound Holds Above 1.32 as Fed Rate Cut Bets and U.K. £22B Fiscal Cushion Lift the Pound

GBP/USD Holds Above 1.32 as Fed Cut Bets and UK Fiscal Rebalancing Collide

GBP/USD remains steady around 1.3230, stabilizing after five consecutive sessions of gains as both monetary and fiscal narratives in the U.K. and the U.S. clash for market direction. The pair earlier touched 1.3273, its highest level in over four weeks, before consolidating amid thin liquidity conditions due to the U.S. Thanksgiving holiday. Despite momentum fatigue, the broader setup remains constructive, with the pound supported by expectations of a Bank of England (BoE) rate cut in December and the market’s increasing conviction that the Federal Reserve (Fed) will follow suit.

U.K. Fiscal Outlook: Reeves’s Tax-Heavy Budget Reshapes Market Expectations

Chancellor Rachel Reeves’s Autumn Budget provided a short-term boost to sterling confidence. Her fiscal framework doubled the U.K.’s fiscal headroom to £22 billion, well above the £15 billion forecast. While this initially calmed gilt markets and sent 10-year yields down toward 4.01%, the underlying budget composition revealed longer-term challenges. Growth forecasts were downgraded to 1.4% for 2026 from 1.9%, while the tax burden is projected to hit 38% of GDP, the highest in modern history.

The Office for Budget Responsibility (OBR) also raised its inflation outlook, noting that welfare spending is expanding at a pace inconsistent with real wage growth. Markets interpreted this as a fiscal trade-off — higher near-term spending offset by delayed tax hikes, leaving limited room for policy mistakes if growth undershoots projections. While this strengthened the pound short-term, the risk of fiscal slippage and back-loaded revenue increases limits medium-term optimism.

Bank of England Signals Policy Shift Ahead of December Decision

Traders are now pricing in a 70% probability of a BoE rate cut at the December 19 meeting, with overnight index swaps implying an end-2025 policy rate near 4.25%, down from 5.25% today. Governor Andrew Bailey noted in recent remarks that the disinflation trend is “broadly in line with expectations,” hinting at potential flexibility. The central bank faces slowing wage growth — average weekly earnings dropped to 5.1% YoY, the weakest since early 2024 — alongside deteriorating retail sales, which fell 0.4% month-over-month in October.

While a rate cut might relieve mortgage stress and household debt burdens, it could also amplify capital outflows if the Fed delays its easing cycle. For now, sterling’s resilience reflects expectations of synchronized U.K.-U.S. rate adjustments rather than standalone domestic strength.

Dollar Weakness Underpins GBP/USD Strength

On the other side of the pair, the U.S. Dollar Index (DXY) has retreated to 99.48, its lowest in over four months. A combination of weaker macro prints and dovish commentary from senior Fed officials has pressured the dollar further. Durable goods orders rose just 0.5%, Chicago PMI fell sharply to 36.3, and jobless claims hovered at 216,000, signaling weakening business sentiment and moderating labor strength.

Fed policymakers, including John Williams and Christopher Waller, reinforced the case for a December rate cut, while forward rate swaps now price in an 85% probability of policy easing at the upcoming FOMC meeting. As yields on 10-year Treasuries fell to 4.17%, the greenback’s yield advantage eroded, boosting cyclical currencies like the pound.

Technical Structure: Bulls Eye 1.3350 as Momentum Builds

Technically, GBP/USD (symbol: GBPUSD) has maintained a strong recovery structure since bouncing from its 1.3040 November low. The pair cleared a descending trendline and is now testing resistance at 1.3280, near the 200-day EMA. A sustained break above 1.3295–1.3350 could confirm a new medium-term bullish leg, targeting 1.3470, the late-summer swing high.

Momentum indicators remain elevated. The RSI holds above 70, confirming bullish control but hinting at near-term exhaustion risk. Support levels are layered at 1.3215, 1.3160, and 1.3120 — all former resistance zones now turned potential demand areas. A daily close below 1.3050 would neutralize bullish momentum and open the door for a retracement toward 1.2960–1.30.

Correlation with Bond and Commodity Markets

Sterling’s behavior continues to track bond spreads and risk appetite. The 2-year gilt–Treasury yield differential widened to +48 basis points, its most positive in three months, supporting the pound’s strength. Meanwhile, commodity-linked volatility remains low — with WTI crude (CL=F) stable near $58.90 and gold (XAU/USD) hovering around $4,150 — suggesting markets are not in risk-off mode. This reinforces steady buying in high-beta currencies like GBP while speculative demand for the USD remains subdued.

Market Sentiment: Thin Liquidity, Heavy Positioning

Thanksgiving trading has thinned volumes, but speculative positioning shows a notable shift. CFTC data indicates net-long GBP contracts rising to +13,400, the highest since June, while USD longs declined by 11% week-over-week. Hedge funds continue rotating out of dollar-heavy carry trades, reflecting confidence that the Fed’s tightening cycle is effectively over.

Still, risks remain. If December’s U.S. nonfarm payrolls (due December 6) surprise on the upside or inflation re-accelerates, Fed expectations could shift rapidly, triggering a USD rebound that pressures GBP/USD back below 1.31.

Outlook: Controlled Upside with Structural Caution

The medium-term outlook favors a gradual advance toward 1.3350, contingent on sustained dovish rhetoric from both central banks. However, sterling’s rally may stall if macro data fails to confirm economic stabilization. For the U.K., wage disinflation and stagnant output cap real growth potential; for the U.S., labor data and Treasury auctions will decide whether the greenback’s softness endures.

Given this alignment, traders should expect volatile but directional trading within 1.3150–1.3350 through early December. The overall technical and fundamental bias remains moderately bullish, with corrections viewed as entry opportunities rather than trend reversals.

Verdict: Buy – GBP/USD Positioned for Controlled Upside as Fed Cut Bets Dominate

While overbought conditions may trigger short-term pauses, the broader structure supports continued upside. The combination of BoE flexibility, softer U.S. yields, and improving fiscal stability in the U.K. provides a strong base for further gains. A decisive break above 1.3350 could confirm trend continuation toward 1.3470, while sustained support above 1.3150 keeps the bullish bias intact.

Bias: Buy above 1.3215
Targets: 1.3350 → 1.3470
Stop Zone: 1.3050

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