GBP/USD Extends Bullish Momentum as the Dollar Weakens
- GBP/USD rose nearly half of a percent as US Dollar weakness persists.
- Firm US GDP figures did little to bolster the Greenback against the Pound Sterling.
- The US Dollar is testing October lows with a holiday-shortened trading week on the cards.
GBP/USD climbed approximately 0.45% on Tuesday, supported by a general decrease in global US Dollar (USD) flows. Investor sentiment is positive as we approach the midpoint of a holiday-shortened week, with the Greenback pressured by expectations for further easing by the Federal Reserve (Fed) into 2026.
Dollar falls on Fed rate cut expectations
On Tuesday, the US Dollar weakened in thin, holiday-shortened trading, as expectations of additional Fed rate cuts next year continued to dampen sentiment, despite stronger-than-expected economic data. A surprisingly robust annualized growth of 4.3% in US Gross Domestic Product (GDP) for the third quarter did not lead to a recovery against the Pound Sterling (GBP), which stepped into 12-week highs against the USD. Nevertheless, the market largely believes the Fed will maintain its position in January before resuming cuts later in the year, with futures indicating two cuts in 2026.
Some analysts have warned that the positive headline GDP growth may overstate the economy's true health. They point out that this growth was primarily driven by healthcare spending and inventory drawdowns, rather than widespread business momentum. Coupled with signs of a weakening labor market and a decline in US consumer confidence in December, these factors suggest that the dollar could remain under pressure into early next year, despite some near-term resilience in growth data.
The GBP gained ground against the Greenback, while the US Dollar Index (DXY) fell to its lowest level since early October. The index is on track for its steepest annual decline since 2017, reflecting a broader trend away from US Dollar strength as global rate expectations change.
Wednesday will be the last significant trading day for GBP/USD this week, as American markets will close early, and European markets will be closed on December 25 and 26.
GBP/USD daily chart
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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