The GBP/USD pair fell to around 1.3330 during Thursday’s Asian trading hours as demand for the US Dollar increased. This dip occurred after the pair neared a two-month high, though expectations of a Federal Reserve rate cut next week may provide some limit to its decline. Traders will closely watch the US Initial Jobless Claims report for further guidance.
Weaker US economic data, such as Manufacturing PMI and ADP Employment Change, this week have strengthened the case for a rate cut by the Federal Reserve at the December meeting. This move could pressure the US Dollar, potentially benefiting the GBP/USD pair.
Market Speculation on Fed Policy
On Wednesday, the GBP/USD pair rose above 1.3300 as speculation about Kevin Hassett potentially becoming the next Federal Reserve Chair led to bets on a more dovish Fed stance. The US Dollar declined following President Donald Trump’s comments about a “potential” Fed Chair during a press conference.
The US ISM Services PMI showed activity steady in November, recording 52.6, up from 52.4. Forecasts had expected a figure of 52.1. Although the index expanded, orders slowed down, with employment remaining low and input prices rising.
Looking back at the conditions in late 2019, we saw a similar playbook where weak US manufacturing and employment data fueled strong bets on a Federal Reserve pivot. This speculation on central bank policy made pairs like GBP/USD highly sensitive to rumors and headlines. The historical pattern reminds us how quickly expectations of rate cuts can weaken the dollar.
Today, we see echoes of this as recent data shows US inflation cooling to 2.8% and the latest Non-Farm Payrolls report added just 150,000 jobs, missing forecasts. This has pushed market expectations for a Fed rate cut in the first quarter of 2026 to over 70%, according to the CME FedWatch Tool. Consequently, the dollar has softened, providing a floor for GBP/USD in the near term.
Strategizing for Potential Volatility
This environment of high expectation but uncertain outcome suggests we should prepare for volatility around the next Fed announcement. We remember that in December 2019, the Fed ultimately held rates steady, catching many off guard and causing a sharp reversal. Therefore, using options to buy straddles on GBP/USD could be a sound strategy to profit from a large price move in either direction.
We also have to consider the UK side of the equation, as policy divergence is key. Recent data from the Office for National Statistics shows UK inflation remains more persistent at 3.5%, leading the Bank of England to maintain a more hawkish tone than the Fed. This fundamental divergence could provide a sustained tailwind for the pound against the dollar in the weeks ahead.
