The Pound Sterling (GBP) recovery gathered steam against the US Dollar (USD), driving GBP/USD to fresh five-week highs above the 1.3350 level.
Pound Sterling cheered renewed USD weakness
GBP/USD witnessed the extension of the UK Budget-inspired relief rally amid a sustained bearish sentiment around the US Dollar, which bolstered its recovery momentum.
Last week, British Chancellor of the Exchequer Rachel Reeves announced a tax hike amounting to an annual £26 billion to fund the fiscal hole. The UK’s Office for Budget Responsibility (OBR) raised the country’s GDP forecast for 2025 to 1.5% from the previous forecast of 1%.
Pound Sterling, however, capitalized on the absence of any major tax burden on households, as the Labour Party stuck to its self-imposed rule of avoiding fresh borrowings for day-to-day spending, as explained by FXStreet’s Analyst Sagar Dua.
Across the Atlantic, the USD faced headwinds from persistent dovish expectations for the US Federal Reserve’s (Fed) December monetary policy meeting and beyond.
A flurry of unimpressive US data releases kept the bets for a 25 basis points (bps) December Fed rate cut elevated around 90%, according to the CME Group’s FedWatch Tool.
Earlier in the week, the Institute for Supply Management (ISM) Services PMI showed little improvement in November at 52.6 versus 52.4 in October, while the Automatic Data Processing (ADP) said that US private payrolls unexpectedly declined by 32K in November, following a revised 47K increase. Analysts estimated a job gain of 5K.
Data on Thursday showed that the Initial Claims for state unemployment benefits fell 27,000 to a seasonally adjusted 191,000 for the week ended November 29, the lowest level since September 2022.
However, data published by Challenger, Gray & Christmas showed that employers reported 71,321 job cuts in November, its highest level for that month since 2022. Mixed US economic data did little to alter markets’ expectations of a Fed rate cut this month.
Further weighing on the USD were US President Trump’s repeated comments that he has “already decided” who will replace Fed Chairman Jerome Powell in May 2026.
Following his recent references and media reports, markets considered White House Economic Adviser Kevin Hassett as Trump’s top pick for the next Fed Chair.
Hassett has endorsed Trump’s calls for lower rates on several occasions as the head of the National Economic Council (NEC).
Heading toward the weekend, the pair held its bullish streak after the delayed September US annual core Personal Consumption Expenditures (PCE) Price Index rose 2.8%, against the expected increase of 2.9% in the same period.
Meanwhile, the University of Michigan (UoM) preliminary Consumer Sentiment climbed to 53.3 in December, compared to November’s 51 and 52 forecast. The one-year Consumer Inflation Expectations declined to 4.1% in December after reporting 4.5% in November.
Focus on Fed policy announcements and UK GDP
It’s a relatively busy week, in terms of economic events, with the Fed policy announcements on Wednesday likely to stand out.
A 25 bps rate cut by the Fed is almost certain, and hence, all eyes will be on the US central bank’s Summary of Economic Projections (SEP), the so-called Dot Plot chart, for fresh insights on the interest rate path for 2026.
Fed Chairman Jerome Powell’s words at the post-policy meeting press conference will also hold weight, having a significant impact on the USD and the GBP/USD pair.
Ahead of the Fed event risk, Tuesday’s US JOLTS Job Openings and the ADP Weekly Employment Change data will be eagerly awaited.
Later in the week, the monthly Gross Domestic Product (GDP) from the United Kingdom (UK), due on Friday, could offer some incentives to Pound Sterling traders.
Apart from the data releases, markets will closely scrutinize speeches from BoE and Fed policymakers and any developments on the US-Russia discussions on the potential Ukraine peace deal.
GBP/USD Technical Analysis
In the daily chart, the 21-day Simple Moving Average (SMA) has turned higher and price holds above it, with the pair also above the 50-day SMA but still beneath the declining 100-day SMA. The rising 200-day SMA sits just below price, hinting at a gradual improvement in the medium-term tone, while the 100-day SMA at 1.3368 caps the topside. The Relative Strength Index (RSI) is at 62, supportive without entering overbought territory.
Short-term posture improves as the 21-day SMA rises beneath price, while the 50-day SMA continues to drift lower, underscoring an ongoing transition. Risk stays skewed higher while above the rising 200-day SMA, with support concentrated between 1.3329–1.3267. A daily close north of moving-average resistance would add traction to the recovery, whereas a break back into that support band would stall momentum.
(The technical analysis of this story was written with the help of an AI tool)
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
