GBP/USD rose to 1.3349, reflecting a 0.19% increase for the day, as market participants intensified their positioning in anticipation of next week’s FOMC decision. The U.S. Dollar Index is currently trading weakly in the range of 98.9–99.3, marking its lowest level since May, as market participants assign an 84–90% likelihood to a 25-basis-point rate cut by the Federal Reserve. The U.S. Core PCE Price Index increased by 0.2% month-over-month and 2.8% year-over-year, indicating a continuation of disinflation trends. Meanwhile, the University of Michigan Consumer Sentiment Index jumped to 53.3, marking its highest point since July. Even with strong consumer sentiment, the moderating inflation forecast remains a key factor in shaping expectations for policy adjustments. Market participants have significantly increased their long-sterling positions as the yield differential with the dollar diminishes. The two-year U.S.–U.K. yield spread has narrowed to 23 basis points, marking the tightest margin since 2021. Derivatives markets indicate a notable change: call volumes on sterling have increased by 26% week-over-week, while leveraged funds now hold 28,000 net long GBP futures contracts, a significant rise from 18,000 just a month prior. The evidence is evident — a dovish Federal Reserve is driving the pound’s upward trajectory, particularly following a consistent increase from 1.3150 in early November to surpassing 1.3360 at present.
GBP/USD is currently consolidating slightly above 1.3330, facing near-term resistance at 1.3365, which aligns with the 100-day SMA. A confirmed breakout above 1.3365 establishes the next resistance levels at 1.3471 and 1.3500, which represent the multi-month ceiling that restricted price movement during Q3 2024. Support is identified at 1.3300, 1.3250, and 1.3186. A sustained break below 1.3186 would indicate a shift to a corrective phase, targeting 1.3040 as the next significant retracement level. Indicators suggest bullish sentiment — RSI is currently at 61, and the MACD indicates widening positive divergence, reflecting robust underlying momentum. Across the Atlantic, the Bank of England encounters a significant policy challenge. A 25 basis points reduction to 3.75% is anticipated at the meeting on December 18 as officials address the challenges of slowing growth and easing wage pressures. The U.K. experienced a modest Q3 GDP increase of 0.1% quarter-over-quarter, alongside a decline in average earnings from 7.7% to 6.9% on an annual basis. In light of the weaker data, the BoE is exercising caution regarding any aggressive cuts, remaining mindful of the inflation risks associated with energy and imported goods. The divergence between the BoE and the Fed continues to be a significant structural factor: with the Fed indicating potential cumulative cuts of up to 100 bps by mid-2026, the pound maintains a relative yield advantage in the short term.
Volatility expectations increased significantly as we approached the end of 2025. The one-week implied volatility for GBP/USD increased to 8.6%, compared to 6.1% the previous week. Market participants are preparing for significant fluctuations surrounding the FOMC and BoE meetings. Options data indicates increasing bullish sentiment — call spreads aimed at 1.3450–1.3500 have experienced significant inflows, while short-put writers are concentrated around 1.3200, wagering that this level will serve as strong structural support. Intermarket relationships indicate a prevailing trend of dollar weakness among G10 pairs. EUR/USD remains steady close to 1.1640, whereas USD/JPY is positioned around 155.00, indicating a general decline of the dollar. The correlation between GBP/USD and DXY remains strongly inverse at –0.91, indicating that the movement of sterling continues to reflect changes in U.S. yields. This alignment underscores the extent to which GBP/USD is influenced by developments on the dollar side, rather than unexpected events within the U.K. Recent short-term order flow data indicates a steady accumulation beneath the 1.3300 level, where there is a notable concentration of institutional liquidity. Spot volume distribution indicates an increase in involvement from macro hedge funds, whereas retail long positioning has seen a slight decrease — suggesting a trend that is increasingly influenced by professional entities. The options market has experienced a positive shift in skew, as risk reversals are indicating a 0.45 volatility premium for sterling calls compared to puts, marking the most bullish sentiment observed since February. This indicates a strong belief in a breakout towards 1.35–1.36, contingent upon the Fed affirming its dovish position.
The macro divergence between the U.S. and U.K. continues to be the key determinant for GBP/USD as we approach 2026. The annualized growth rate in the U.S. has decelerated to 1.4%, with core inflation remaining under 3%, providing the Federal Reserve with the opportunity to relax its policy stance. The stagnation in the U.K. is coupled with persistent services inflation, leading the Bank of England to approach cuts with caution. With the Fed’s quicker and earlier pivot, the positioning suggests a favorable outlook for sterling appreciation through Q1 2026. Consensus models indicate that GBP/USD is expected to average 1.3450 in early 2026, with a potential rise toward 1.3550–1.36 by mid-year, provided there are no disruptions from global demand or fiscal tightening. From a tactical perspective, the Buy-on-Dips strategy continues to be the prevailing approach. Institutional desks suggest building positions around 1.3250–1.3300, with a target range of 1.3470–1.3550 for Q1 2026. Downside protection must stay under 1.3180, as this is where technical invalidation takes place. The medium-term outlook remains positive for the pound, provided that the Fed’s easing cycle stays in place and U.S. inflation data does not pick up again.