GBP/USD Steadies As Markets Weigh Fed-BoE Rate Divergence In Thin Liquidity

Photo by Colin Watts on Unsplash GBP/USD trades around 1.3490 on Monday, down 0.10% on the day at the time of writing. The pair is consolidating after recent moves, as investors remain cautious ahead of year-end and the holiday period, which typically sees thinner liquidity due to the New Year holiday.The Pound Sterling (GBP) lacks support despite expectations surrounding the Bank of England’s (BoE) monetary policy stance. Markets believe the UK central bank will adopt a gradual pace of monetary easing in 2026, as inflation in the United Kingdom (UK) remains well above the 2% target. Although price pressures have eased in recent months, annual inflation slowed to 3.2% in November after peaking at 3.8% between July and September, limiting the central bank’s room for maneuver.At its latest policy meeting, the Bank of England cut interest rates by 25 basis points to 3.75% following a close five-to-four vote, highlighting persistent inflation concerns. BoE Governor Andrew Bailey recently reiterated that interest rates remain on a downward trajectory, while stressing that the scope for further cuts is limited as rates approach their neutral level and will depend heavily on incoming economic data. On the growth front, UK Gross Domestic Product (GDP) expanded by 0.1% in the third quarter, in line with expectations, while the central bank projects near-flat growth in the final quarter of the year.Meanwhile, the US Dollar (USD) rebounds slightly, while investors continue to expect a faster easing cycle from the Federal Reserve (Fed) in 2026. According to the CME FedWatch tool, markets are pricing in more than a 70% chance of at least 50 basis points of cumulative rate cuts next year. These expectations contrast with the Fed’s own projections, as the latest dot plot shows policymakers anticipating the Federal Funds Rate to be around 3.4% by the end of 2026, implying a limited number of rate cuts from the current 3.50%-3.75% range.Speculation about a more accommodative US monetary policy stance has intensified following comments from US President Donald Trump, who said he would like the next Fed Chair to favor lower interest rates. Against this backdrop, investors are now focused on the release of the Federal Open Market Committee (FOMC) Minutes on Tuesday, which could provide a final insight into the Fed’s internal rate discussions before year-end.More By This Author:Down 45% This Year, Is Bloomin’ Brands Finally Finding A Floor? USD/CAD Trades Near Five-Month Lows As BoC-Fed Policy Divergence Favours The Loonie Japanese Yen Stands Firm Near Weekly Top Against Weaker USD; Seems Poised To Climb Further