GBP/USD Price Forecast - Pound Holds Above 1.33 as Fed-Cut Bets and UK PMI Strength Bolster Pound

GBP/USD (British Pound – U.S. Dollar) Gains Momentum Above 1.3350 as Fed Easing Bets Drive Dollar Weakness and BoE Awaits Inflation Cooling

Sterling Strengthens as Dollar Loses Ground Ahead of FOMC

GBP/USD climbed to 1.3349, marking a 0.19% daily gain, as investors accelerated their positioning ahead of next week’s FOMC decision. The U.S. Dollar Index (DXY) remains weak around 98.9–99.3, its lowest since May, as the market prices in an 84–90% probability of a 25-basis-point rate cut by the Federal Reserve. The U.S. Core PCE Price Index rose 0.2% month-on-month and 2.8% year-on-year, confirming disinflation momentum, while the University of Michigan Consumer Sentiment Index surged to 53.3, its strongest level since July. Despite resilient consumer sentiment, the cooling inflation outlook continues to anchor expectations for policy easing.

Fed Pivot and Yield Compression Anchor Pound’s Momentum

Traders have shifted heavily toward long-sterling exposure as the dollar’s yield advantage narrows. The two-year U.S.–U.K. yield spread has compressed to 23 basis points, the smallest gap since 2021. Derivatives markets confirm the shift: call volumes on sterling have risen 26% week-over-week, and leveraged funds hold 28,000 net long GBP futures contracts, up sharply from 18,000 a month earlier. The conviction is clear — a dovish Fed is fueling the pound’s upside momentum, especially after a sustained rally from 1.3150 in early November to above 1.3360 now.

Technical Structure Suggests Room Toward 1.35

Technically, GBP/USD is consolidating just above 1.3330, with near-term resistance at 1.3365 (the 100-day SMA). A confirmed breakout above 1.3365 opens the next resistance zones at 1.3471 and 1.3500, the multi-month ceiling that capped price action throughout Q3 2024. Support lies at 1.3300, 1.3250, and 1.3186. A sustained break below 1.3186 would shift bias to corrective mode, exposing 1.3040 as the deeper retracement area. Indicators favor the bulls — RSI remains elevated at 61, while the MACD shows widening positive divergence, signaling strong underlying momentum.

Bank of England’s Policy Crossroads

Across the Atlantic, the Bank of England (BoE) faces its own policy dilemma. A 25 bps rate cut to 3.75% is expected at the December 18 meeting as officials confront slowing growth and moderating wage pressures. U.K. Q3 GDP rose just 0.1% quarter-over-quarter, while average earnings cooled from 7.7% to 6.9% annually. Despite weaker data, the BoE remains cautious about cutting too aggressively, aware of inflation risks from energy and imported goods. The BoE–Fed divergence remains the key structural driver: with the Fed signaling as much as 100 bps of cumulative cuts by mid-2026, the pound retains a relative yield premium in the near term.

Volatility and Positioning: Traders Brace for Dual Central Bank Week

Volatility expectations surged into the final weeks of 2025. The one-week implied volatility for GBP/USD rose to 8.6%, up from 6.1% a week earlier. Traders are positioning for sharp moves around the FOMC and BoE meetings. Options data shows rising bullish exposure — call spreads targeting 1.3450–1.3500 have seen heavy inflows, while short-put writers cluster around 1.3200, betting that the level will hold as firm structural support.

Macro Correlations Reinforce Sterling’s Lead

Intermarket relationships confirm the dominance of dollar weakness across G10 pairs. EUR/USD holds firm near 1.1640, while USD/JPY trades around 155.00, reflecting the dollar’s broad retreat. The GBP/USD–DXY correlation remains tightly inverse at –0.91, meaning sterling’s trajectory continues to mirror U.S. yield shifts. This alignment highlights how closely GBP/USD remains tethered to dollar-side developments rather than U.K. domestic surprises.

Market Internals and Option-Derived Flows

Short-term order flow data shows consistent accumulation below 1.3300, where institutional liquidity clusters have thickened. Spot volume distribution reveals growing participation from macro hedge funds, while retail long positioning has declined slightly — a sign of professional-led control in the current trend. On the options side, skew has shifted positively, with risk reversals pricing a 0.45 vol premium for sterling calls over puts, the most bullish bias since February. This reflects confidence in a breakout toward 1.35–1.36 if the Fed confirms its dovish stance.

Economic Divergence and Path Into 2026

The macro divergence between the U.S. and U.K. remains the defining factor for GBP/USD heading into 2026. U.S. growth has slowed to 1.4% annualized, while core inflation hovers below 3%, giving the Fed space to ease policy. In contrast, the U.K.’s stagnation is accompanied by sticky services inflation, prompting the BoE to balance cuts carefully. As the Fed pivots sooner and faster, the relative positioning favors sterling appreciation through Q1 2026. Consensus models project GBP/USD averaging 1.3450 in early 2026, rising toward 1.3550–1.36 by mid-year, assuming no shocks from global demand or fiscal tightening.

Trading Strategy and Bias

From a tactical standpoint, the Buy-on-Dips approach remains the dominant strategy. Institutional desks recommend accumulating near 1.3250–1.3300, targeting 1.3470–1.3550 in Q1 2026. Downside protection should remain below 1.3180, where technical invalidation occurs. The medium-term trajectory continues to favor the pound as long as the Fed’s easing cycle remains intact and U.S. inflation data does not reaccelerate.

Verdict: BUY — GBP/USD remains structurally bullish. The pair trades on firm ground above 1.3330, with upside potential toward 1.35–1.36 as yield spreads compress, Fed cuts approach, and BoE restraint stabilizes sterling’s appeal into early 2026.

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