The Pound Sterling (GBP) is experiencing a surge in value, reaching a nearly 12-week high against the US Dollar (USD) during European trading hours on Tuesday. This upward trend is largely attributed to the Bank of England's (BoE) anticipated gradual monetary easing path in 2026. Last week, the BoE reduced interest rates by 25 basis points (bps) to 3.75%, with a narrow majority vote, signaling a gradual downward path for rates. However, this decision was not without dissent, as four members of the Monetary Policy Committee (MPC) opposed the cut due to upbeat wage growth outlook, which could keep inflation persistently higher than the central bank's target of 2%.
Despite the UK's headline inflation cooling down to 3.2% in the last two months, it remains significantly above the central bank's target. Governor Andrew Bailey assured that inflation could return to the 2% target by the first half of 2026. Traders expect the BoE to deliver at least one 25 bps interest rate cut in the first half of next year, according to a Reuters report. The Pound Sterling's strength is also driven by the weakness of the US Dollar, which faces intense selling pressure due to the Federal Reserve's (Fed) anticipated interest rate cuts in 2026.
The US Dollar Index (DXY), tracking the Greenback's value against six major currencies, is trading 0.16% lower, near 98.00. The DXY is not far from revisiting the 97.87 low posted last week. The CME FedWatch tool indicates a 73.8% chance of the Fed reducing interest rates by at least 50 bps in 2026, but the Fed's dot plot suggests only one rate cut. Fed Chair Jerome Powell stated that the bar for another interest rate cut is very high.
The GBP/USD pair has extended its advance above the rising 20-day EMA, supporting a bullish bias. The 14-day Relative Strength Index (RSI) is near the overbought zone, confirming strong momentum. The 61.8% Fibonacci retracement at 1.3493 caps the move, and a break of this level could open the path toward the 78.6% Fibonacci retracement at 1.3624. However, a failure to clear the nearby retracement barrier could prompt a pullback toward the moving average.
The US Bureau of Economic Analysis (BEA) releases the Gross Domestic Product (GDP) growth on an annualized basis for each quarter. The real GDP Annualized measures the value of final goods and services produced in the US, and changes in GDP are the most popular indicator of the nation's economic health. A high reading is bullish for the US Dollar, while a low reading is bearish. The market reacts to the first estimate, with positive surprises being USD-positive and disappointing prints weighing on the greenback.
