Pound Sterling Gains on US Dollar as Fed Dovish Outlook for 2026 Persists

The Pound Sterling (GBP) strengthened against the US Dollar (USD) on Wednesday, climbing to around 1.3535 during the European session—its highest level in three months. The GBP/USD pair remained firm as the Greenback underperformed broadly, with stronger-than-expected US economic data failing to shake market expectations for a more dovish Federal Reserve stance in 2026.

US Dollar Weakens Despite Strong GDP Growth

At the time of writing, the US Dollar Index (DXY), which measures the dollar against six major currencies, slipped to an 11-week low near 97.75. This decline came even after the US Bureau of Economic Analysis reported that annualized GDP growth reached 4.3% in the third quarter, accelerating from 3.8% in the previous quarter.

Market participants appear to be looking beyond headline growth figures. According to the CME FedWatch tool, traders assign a 70.6% probability that the Federal Reserve will cut interest rates by at least 50 basis points in 2026. This expectation exceeds the single rate cut projected by policymakers in last week’s monetary policy update.

Fed Dovish Bets and Economic Imbalances

Analysts note that the latest GDP report offered limited evidence of strong job creation, despite robust output growth. Business investment, particularly in equipment and artificial intelligence, accounted for a large share of the expansion. Economists have described the recovery as increasingly uneven, with higher-income households driving spending on leisure and recreation, while demand from low- and middle-income consumers remains constrained by elevated inflation and a soft labor market.

Forex forecast covering GBP/USD and EUR/USD moves amid interest rate outlooks from the Federal Reserve and Bank of England.

BoE Policy Supports Pound Sterling

Sterling has also drawn support from the Bank of England’s recent policy decision. Last Thursday, the BoE cut interest rates by 25 basis points to 3.75% in a narrow 5–4 vote, while emphasizing a gradual approach to further easing. Policymakers avoided signaling aggressive cuts, citing inflation that remains above the 2% target despite easing to 3.2% year-on-year in November.

Focus Shifts to UK Outlook and US Data

Looking ahead, investors are assessing how far the BoE may ease policy in 2026. Market expectations, cited by Reuters, suggest at least one additional 25-basis-point cut in the first half of the year. In the near term, the GBP/USD pair may react to upcoming US Initial Jobless Claims data, scheduled for release at 13:30 GMT.

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