GBP/USD steadies as Fed Minutes eyed, BoE maintains cautious outlook

GBP/USD trades around 1.3460 on Tuesday at the time of writing, down 0.30% on the day. The pair consolidates after failing to sustain the bullish momentum seen last week, which had lifted it to a more than three-month high near 1.3535. This pause reflects lingering hesitation in the US Dollar (USD), as market participants remain cautious ahead of the release of the Minutes from the latest Federal Open Market Committee (FOMC) meeting.

The US Dollar trades without a clear trend, with the US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, holding steady around 98.10. Markets are looking for more detailed insight into internal discussions at the Federal Reserve (Fed) regarding the monetary policy outlook. At its latest meeting, the Fed delivered its third consecutive rate cut of the year, lowering the Federal Funds target range to 3.50%-3.75%. Updated economic projections, including the dot plot, now point to a policy rate near 3.4% by 2026, suggesting only one additional rate cut next year.

This projected path appears more restrictive than what markets are currently pricing in. According to the CME FedWatch tool, investors remain highly confident that the Fed will deliver at least two further rate cuts, amounting to a cumulative easing of around 50 basis points by the end of 2026. This divergence between market expectations and official guidance continues to generate contained but persistent uncertainty around the US Dollar.

On the UK side, the Pound Sterling (GBP) continues to benefit from a relatively supportive backdrop. The currency has remained broadly resilient against its major peers in recent weeks, underpinned by expectations that the Bank of England (BoE) will proceed cautiously with monetary easing in 2026. At its latest meeting, the BoE lowered its policy rate by 25 basis points to 3.75%, while stressing that further easing would follow a gradual path.

This cautious stance reflects still-elevated inflation in the United Kingdom (UK). Although headline inflation slowed to 3.2% in November from a peak of 3.8% in September, it remains well above the central bank’s 2% target. BoE Governor Andrew Bailey recently noted that the scope for further rate cuts could be limited as policy approaches its neutral level, making future decisions highly dependent on incoming economic data.

Looking ahead to 2026, expectations for the BoE will largely hinge on developments in the UK labor market and Gross Domestic Product (GDP) growth. Labor demand remained subdued in 2025, as employers curtailed hiring to offset higher social security contributions, a factor that could continue to weigh on economic momentum.

In the United States (US), attention is also turning to political developments. US President Donald Trump said he would announce Jerome Powell’s successor as Chair of the Federal Reserve in January. This decision could influence monetary policy expectations, as the incoming Fed Chair is widely seen as potentially favoring a more accommodative stance, in line with the White House’s preference for lower interest rates even if financial markets remain strong.