Insights 
VT 
The GBP/USD experienced a downturn following the US Federal Reserve’s decision to cut interest rates by 25 basis points. This cut met market expectations, and while it didn’t cause a significant market upheaval, it contributed to a decline in the currency pair.
The Federal Reserve also confirmed plans to reduce its Quantitative Easing (QE) measures, shifting its asset balance sheet into long-term Treasuries by December 1. This was the second consecutive rate cut, despite some increase in inflationary pressures during the year’s second half, which didn’t deter further rate reductions.
Anticipations for the Next Fed Meeting
As the Federal Open Market Committee (FOMC) prepares for another meeting on December 10, market participants are anticipating the possibility of a third rate cut. The Federal Reserve holds eight pre-scheduled meetings annually to make decisions on interest rates aimed at maintaining 2% inflation and full employment.
Changes in interest rates influence the US Dollar’s strength, with rate hikes typically attracting more foreign capital inflows, thereby strengthening the USD. Conversely, rate cuts can lead to a weaker USD as capital shifts to countries with higher returns.
Given the Federal Reserve’s second consecutive rate cut on October 29, 2025, we are now in a period of confirmed but cautious US dollar weakness. The 25-basis point cut was fully priced in, which is why the immediate drop in GBP/USD was contained. The key takeaway for us is that the market is now entirely focused on the December 10 FOMC meeting for signs of a third cut.
The conflicting signals from the Fed, cutting rates while also continuing its balance sheet drawdown, are likely to increase volatility in the dollar. This presents an opportunity for traders using options, as strategies like long straddles on major USD pairs could benefit from a significant move in either direction. We see this as a prudent way to position for the uncertainty leading into the final weeks of 2025.
Inflation and Labor Market Pressures
What makes a third rate cut less certain is the persistent inflation data we have been seeing. The most recent US Consumer Price Index report for September 2025 showed headline inflation holding stubbornly at 3.6%, well above the Fed’s 2% target. With the labor market also remaining tight, as shown by the addition of 215,000 jobs in September, some Fed officials may be reluctant to cut again so soon.
Looking at the other side of the pair, the situation in the UK suggests the Bank of England is in no position to start cutting rates. The UK’s September 2025 inflation rate was just released at 5.1%, significantly higher than in the US. This policy divergence, where the Fed is easing while the BoE is forced to hold, creates a fundamental argument for further GBP/USD weakness.
Therefore, we see merit in positioning for a continued slide in the pound against the dollar over the next several weeks. Traders could consider buying GBP/USD put options with expirations after the December 10 Fed meeting to capitalize on this potential move. Selling out-of-the-money call spreads would be a more conservative strategy to generate income while maintaining a bearish bias.
This situation feels somewhat similar to the Fed’s “insurance cuts” back in 2019, but with a critical difference in the inflationary backdrop. Back then, low inflation gave the Fed a green light to ease policy without concern. The persistent price pressures we are observing today mean that another rate cut in December is far from guaranteed, and we should trade accordingly.
