The UK economy continues to contract, but the bond market has stabilized after recent shocks. What does this mean for GBP/USD? Risk appetite and monetary policy are key factors to watch. Let’s discuss this and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- The Fed and the Bank of England are both inclined to cut rates.
- UK GDP last grew in June.
- Global risk appetite is supporting the pound.
- Buying GBP/USD remains relevant, with targets at 1.358 and 1.368.
Weekly Fundamental Forecast for Pound Sterling
If all your friends jumped off a cliff, would you do that too? Not necessarily. While most central banks are signaling a pause in monetary easing cycles and even hinting at a hawkish turn, the Fed and the Bank of England stand out as exceptions.
Policymakers differ, just like people do. They do not always follow the Fed as the leader of the pack, although they tend to listen closely to every word from Washington. In this sense, the December FOMC meeting naturally gave GBP/USD a boost.
The UK spent months preparing for Rachel Reeves’ budget and feared a repeat of what happened three years ago, when the pound fell to record lows. It is no surprise that the economy and financial markets are still recovering. Bonds were the first to regain their footing. Yields remain the highest among G7 countries, but the narrowing gap with US, French, Italian, and German bonds suggests investors approved the Chancellor’s proposal.
Bond Yield Spread Dynamics
Source: Bloomberg.
According to Deutsche Bank, this is because Reeves’ plan builds in a bigger fiscal safety margin and calls for issuing fewer bonds than previously planned. Stabilization in the UK debt market, together with strong global risk appetite that favors the pound, are the main drivers in the GBP/USD rally, alongside expectations that the Fed’s monetary easing cycle will continue.
Unfortunately, consumers need more time to recover from the budget-related turmoil. In October, the economy contracted again, showing declines in six of the past seven months. GDP growth was recorded only in June. Households are largely to blame for tightening their belts amid fears of higher taxes.
UK Economic Performance
Source: Bloomberg.
Despite this negative trend, the IMF kept its UK GDP growth forecast for 2026 at 1.2% and raised the 2027 projection by 0.2 percentage points to 1.3%. In my view, consumer activity in the UK will pick up sharply over the Christmas period. After all, there was a reason people were saving.
Pressure on sterling comes from expectations that the Bank of England will cut the repo rate by 25 basis points to 3.75% at its December 18 meeting. The futures market puts the probability of this outcome at 90%. However, the Fed’s recent hawkish cut showed that such a move could be followed by a prolonged pause. The Bank of England appears ready to take a similar approach, especially given that its Monetary Policy Committee is even more divided than the FOMC. According to Bank of America, the decision will be a 5–4 vote.
Weekly Trading Plan for GBP/USD
In my view, support for GBP/USD from the UK bond market and strong global risk appetite outweigh the negatives of a weak economy and an imminent repo rate cut. Weakness in the US labor market should allow the pound to continue its rally toward the previously stated targets at 1.358 and 1.368, providing a foundation for opening new longs.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
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