GBP/USD rose as the Bank of England cut rates by 25 basis points in a close 5–4 vote, with indications of hawkish sentiment. The pair traded at 1.3410, up 0.28%, boosted by a softer US Consumer Price Index, which decreased to 2.7% year on year in November.
The US core inflation fell to 2.6% from 3%, reflecting moderated price pressures. Initial Jobless Claims for the week ending December 13 decreased to 224K, surpassing expectations of 225K. Despite these economic indicators, expectations for a 2026 Federal Reserve rate cut remained largely unchanged at 62 basis points.
Impact of the BoE Rate Cut
The BoE’s rate cut from 4% to 3.75% propelled GBP/USD higher. The minutes from the BoE meeting indicated uncertainty about future interest rates, citing inflation persistence data that showed both positive signs and potential risks.
Looking ahead, US economic data on Personal Consumption Expenditures Price Index and Michigan Consumer Sentiment will be significant. In the UK, traders will monitor November’s Retail Sales for a possible increase from 0.2% to 0.9% year on year.
GBP/USD technical analysis reveals bullish momentum is waning, with possible support at 1.3361 and resistance at 1.3460. A close below 1.3400 could lead to testing lower prices, while a rally above 1.3460 could target the 1.3500 level.
The Bank of England’s split-vote rate cut gives us a reason to be bullish on Sterling, as it signals reluctance to ease policy further. However, the soft US inflation numbers are questionable due to the recent 43-day government shutdown. This creates significant uncertainty heading into year-end trading.
Volatility and Trading Strategies
We must be cautious about this US CPI print, as the data collection was incomplete. Looking back, we saw similar data reliability issues during the 35-day shutdown in 2018-2019, which led to sharp market reactions later. All eyes should now be on the upcoming PCE inflation data to either confirm or contradict this week’s soft reading.
Given this level of doubt, implied volatility on GBP/USD options seems unusually low, especially compared to the spikes above 20% we saw during the UK’s 2022 fiscal crisis. This suggests buying volatility through strategies like straddles could be prudent. Such positions would profit from a large price swing in either direction once the true inflation picture becomes clearer.
For those leaning bullish on the pound, the failure to break the 1.3455 resistance level is a major warning sign. Instead of buying calls outright, a bull call spread would allow for upside participation while limiting the cost. This is a more capital-efficient way to express a view that the pair will grind higher but may not break out explosively.
On the other hand, the fading momentum on the RSI and strong US jobless claims provide a case for a pullback. A drop below the 1.3400 level would target the key moving averages near 1.3350. A bear put spread is a defined-risk way to position for this potential short-term weakness in the cable.
