Sterling Strengthens Against Dollar on Dovish Fed Outlook, While BoE Takes Cautious Stance

The GBP/USD exchange rate continues to extend its upward momentum, trading near 1.3480 in early Asian hours on Friday. The advance reflects growing market conviction that US monetary tightening has peaked, with traders increasingly betting on multiple rate reductions by the Federal Reserve through 2025.

Fed Rate Cut Expectations Drive Dollar Weakness

Market participants are now pricing in approximately 15% odds of an interest rate cut at the Fed’s January meeting, based on CME FedWatch tool data. This shift represents a significant reassessment of US monetary policy, particularly following the Greenback’s steepest annual decline in nearly eight years at the close of 2025. The prospect of at least two rate reductions embedded in market pricing this year stands in sharp contrast to the broader interest rate environment globally.

Adding to downward pressure on the USD, speculation surrounds President Trump’s potential successor to Fed Chair Jerome Powell—whose mandate concludes this year. Trump has signaled preference for a more accommodative policymaker, indicating his expectation that the next Fed leader should maintain lower interest rates and maintain alignment with his administration’s economic priorities. Such commentary has triggered discussions about the future of central bank independence among financial professionals and market observers.

Sterling Supported by Measured BoE Approach

Meanwhile, the Bank of England’s measured approach to rate reductions provides underlying support to cable valuations. The BoE lowered its benchmark rate from 4.0% to 3.75% in December, marking the lowest setting since 2022. Governor Andrew Bailey communicated during the subsequent press conference that further gradual reductions remain likely, though each successive cut will require closer examination of economic conditions. This cautious stance differentiates the UK’s policy trajectory from the more aggressive anticipated cuts in the United States.

The divergence between Fed and BoE policy paths—with the former expected to ease substantially while the latter proceeds incrementally—has become a key driver of GBP/USD dynamics. Philadelphia Fed President Anna Paulson is scheduled to deliver remarks this weekend that may provide additional clarity on the central bank’s 2025 rate trajectory and influence near-term currency positioning.

In aggregate, the combination of Fed dovishness and BoE gradualism creates a favorable backdrop for Sterling appreciation relative to the US Dollar in the near term.