GBP/USD recovers after opening the week with a gap lower, trading around the 1.3510 area during Asian hours on Monday. The pair edges higher as the US Dollar (USD) remains under pressure, largely reflecting market expectations that the Federal Reserve (Fed) could deliver two additional interest rate cuts in 2026.
Fed policy expectations weigh on the US Dollar
Investor attention is turning to the Federal Open Market Committee December Meeting Minutes, due for release on Tuesday, which could provide further clarity on internal policy discussions and the Fed’s rate outlook for 2026.
At its December meeting, the Fed lowered the federal funds rate by 25 basis points, bringing the target range to 3.50%–3.75%. This marked a cumulative 75 bps of easing in 2025, driven by signs of a cooling labor market alongside still-elevated inflation.
According to the CME FedWatch tool, markets are assigning an 81.7% probability that rates will be held steady at the Fed’s January meeting, up from 77.9% a week earlier. Meanwhile, expectations for a 25-bps rate cut have eased, with the implied probability falling to 18.3% from 22.1%.
Recent US labor market data delivered mixed signals. Initial Jobless Claims fell to 214K from 224K, beating market expectations, while Continuing Jobless Claims rose to 1.923 million. The four-week average of Initial Claims edged lower to 216.75K, suggesting some resilience in employment conditions despite broader signs of cooling.
BoE outlook keeps sterling gains in check
On the UK side, the Bank of England (BoE) cut its policy rate by 25 basis points to 3.75% in December, with a narrow 5–4 vote underscoring persistent concerns over inflation. Although UK inflation eased to 3.2% in November, it remains well above the BoE’s 2% target.
Economic growth in the UK remains fragile. Gross Domestic Product expanded by 0.1% in the third quarter, in line with expectations, while the BoE projects flat growth in the final quarter of the year.
BoE Governor Andrew Bailey indicated that further rate cuts are likely to be gradual, cautioning that room for additional easing is limited as rates approach their neutral level. As a result, any further policy moves are expected to be finely balanced and heavily dependent on incoming economic data, a factor that may cap upside in GBP/USD in the near term.
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