Economic and Market Sentiment Update
GBP/USD gained on Friday, recovering from losses as the US Dollar fell amid steady odds for a Federal Reserve rate cut in December. The pair traded at 1.3349, rising by 0.19%, buoyed by the US Core PCE Price Index’s unchanged rise of 0.2% from the previous month.
The University of Michigan Consumer Sentiment in December rose to 53.3 from November’s 51, surpassing expectations of 52. Inflation expectations for Americans declined from 4.5% to 4.1% over one year, and from 3.4% to 3.2% over five years.
Odds for a 25 basis points Fed rate cut at the next meeting are stable at 84%. After the data release, GBP/USD moved towards 1.3350, despite beginning near 1.3340.
Morgan Stanley forecasts 25-bps rate cuts in December, January, and April 2026, projecting the Fed funds rate to conclude at 3%-3.25%. Despite concerns, the UK expects a 25 bps reduction by the Bank of England in December.
GBP/USD faces resistance at the 100-day Simple Moving Average of 1.3365. If breached, the next key level is October’s high of 1.3471, before 1.3500. This week, the British Pound was strongest against the Swiss Franc, showing a 0.9% increase.
Strategic Trading Opportunities
With the Federal Reserve almost certain to cut rates next week, we see continued weakness for the US Dollar. The market is pricing in an 84% chance of a cut, which is pushing the GBP/USD pair higher toward key resistance levels. For traders, this could be a time to consider buying call options to capture further upside in Sterling past the 1.3400 mark.
Today’s core PCE inflation reading of 2.8% is a significant milestone, bringing inflation comfortably within a manageable range for the Fed. We recall that as recently as late 2023, core PCE was stubbornly higher at 3.5%, so this confirms the disinflationary trend needed for a policy shift. This solidifies the case for a sustained dollar downturn, making long positions in GBP/USD futures contracts an attractive strategy for the weeks ahead.
Implied volatility in the pound has been relatively low, but we expect it to pick up around the upcoming Fed and Bank of England meetings. Historically, we saw volatility spike during the policy pivots of 2024, and this time will likely be no different. Traders could consider selling out-of-the-money put options on GBP/USD to collect premium while betting that the pair will hold above key support levels like 1.3300.
We must also watch the Bank of England, which is projected to cut its own rate to 3.75% on December 18th. However, the market’s focus is currently on the Fed beginning a more prolonged easing cycle, similar to what we saw in the late 2010s. This suggests the US Dollar has more room to fall than the Pound, supporting the GBP/USD pair even if both central banks are easing.
The key technical barrier right now is the 100-day moving average at 1.3365. A decisive break above this level, driven by the Fed’s announcement, would signal a new leg up for the pair. We believe this makes buying call spreads a prudent strategy, targeting a move toward the 1.3471 high from back in October.
