US Federal Reserve Future Outlook
US President Donald Trump plans to announce a successor for Jerome Powell as Fed Chair next year, with Kevin Hassett as the frontrunner, potentially influencing interest rate policy.
In the UK, the November budget and remarks from PM Keir Starmer support the possibility of a December rate cut by the Bank of England, which could also affect the Cable. Most analysts predict the central bank will cut interest rates to 3.75%, with a 90% chance of this happening.
Catherine Mann of the BoE noted that the USD’s status as a global reserve currency might be affected by the USA’s foreign policy changes.
We are seeing the GBP/USD pair pull back towards 1.3330 on December 4th, 2025, after touching a multi-month high. This is driven by some renewed demand for the US Dollar, but we expect this to be temporary. The focus for the next two weeks is squarely on the upcoming interest rate decisions from both the Federal Reserve and the Bank of England.
Interest Rate Decisions
The case for a Fed rate cut next week seems almost certain, following a persistent trend of economic softening throughout 2025. We have now seen fifteen straight months of contraction in the ISM Manufacturing PMI, which was last reported at 46.5 for November 2025. This, combined with weekly jobless claims ticking up to 235,000, reinforces our view that the Fed must act to support the economy.
Derivative markets are reflecting this high degree of certainty. We can see the CME FedWatch tool is now pricing in a 92% probability of a 25-basis-point cut at the December meeting. This anticipated move is likely to cap any further US Dollar strength and could provide a tailwind for GBP/USD.
However, the situation for Sterling is complicated by the Bank of England’s own dovish stance. With UK headline inflation having cooled to 2.8% in the latest reading for October 2025, the BoE is also expected to cut rates this month to address sluggish growth. The market is assigning a nearly 90% chance that the BoE will cut its bank rate to 3.75%.
This creates a scenario where both central banks are looking to ease policy, meaning the direction of GBP/USD will depend on who is perceived to be more aggressive going into 2026. The political situation in the US, with a new Fed Chair expected to be announced early next year, suggests a path toward deeper and faster rate cuts. This implies that the US Dollar has a structurally weaker outlook compared to the Pound over the medium term.
For traders, this suggests that the current dip in GBP/USD presents a potential entry point for long positions. Volatility is expected to be high around the central bank meetings, so using options may be a prudent strategy. We believe buying GBP/USD call options with a March 2026 expiry could be an effective way to position for sustained dollar weakness while limiting downside risk.
