Pound Sterling extends higher on hopes of BoE following gradual monetary easing path
- The Pound Sterling rises against its major currency peers as the BoE is expected to follow a slower monetary easing path.
- Investors wait for the BoE to cut interest rates at least once in the first half of 2026.
- The major highlight of Tuesday will be the flash US Q3 GDP data.
The Pound Sterling (GBP) trades broadly higher against its major peers, and revisits the almost 12-week high to near 1.3500 against the US Dollar (USD) during European trading hours on Tuesday. The British currency gains amid expectations that the Bank of England (BoE) will follow a gradual monetary easing path in 2026.
Last week, the BoE reduced interest rates by 25 basis points (bps) to 3.75%, with a narrow majority vote and guided that “rates are on a gradual path downward”. Four of nine members-led Monetary Policy Committee (MPC) dissented on the interest rate cut amid upbeat wage growth outlook, a scenario that could keep inflation persistently higher than the central bank’s target of 2%.
Though the United Kingdom (UK) headline inflation has consistently cooled down in the last two months on an annualized basis to 3.2% after peaking in the July-September period at 3.8%, it is still significantly higher than the central bank’s target of 2%.
In the press conference, following the BoE’s interest rate decision, Governor Andrew Bailey assured that inflation could return close to the 2% target by the first half of 2026.
According to a report from Reuters, traders expect the BoE to deliver at least one 25 bps interest rate cut in the first half of next year.
Daily digest market movers: Pound Sterling outperforms US Dollar
- The sheer strength of the Pound Sterling against the US Dollar is also driven by weakness in the latter. The US Dollar faces intense selling pressure as traders are confident that the Federal Reserve (Fed) will deliver at least two interest rate cuts in 2026.
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.16% lower to near 98.00. The DXY is not very far from revisiting the 97.87 low posted last week.
- According to the CME FedWatch tool, the odds of the Fed reducing interest rates by at least 50 bps in 2026 are 73.8%. However, the Fed’s dot plot published two weeks ago showed that policymakers collectively see the Federal Fund Rate heading to 3.4% by the end of 2026, indicating that there won’t be more than one interest rate cut.
- In the press conference after the central bank's monetary policy decision on December 10, Fed Chair Jerome Powell also stated that the bar for another interest rate cut is very high.
- Fed dovish speculation has intensified due to weakening United States (US) job market conditions, and expectations that the impact of tariffs on inflation was a one-off.
- In Tuesday’s session, investors will focus on the preliminary US Q3 Gross Domestic Product (GDP) data, which will be published at 13:30 GMT.
- The US economy is expected to have expanded at an annualized pace of 3.2%, slower than 3.8% in the second quarter this year. Signs of moderating US GDP growth would prompt expectations for further interest rate cuts by the Fed in the near term.
Technical Analysis: GBP/USD extends rally to near 61.8% Fibonacci retracement at 1.3500
GBP/USD jumps to near 1.3500 on Tuesday. The GBP/USD pair extends its advance above the rising 20-day EMA, which sits at 1.3348 and supports a bullish bias. The 20-day EMA’s upward slope has steepened, underscoring firm demand.
The 14-day Relative Strength Index (RSI) at 68 is near the overbought zone on the daily chart, confirming strong momentum that could stretch further. Measured from the 1.3791 high to the 1.3011 low, the 61.8% Fibonacci retracement at 1.3493 caps the move. A break of this level would open the path toward the 78.6% Fibonacci retracement at 1.3624.
On the contrary, a failure to clear the nearby retracement barrier could prompt a pullback toward the moving average, while sustained strength would preserve the upward tone.
(The technical analysis of this story was written with the help of an AI tool.)
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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