Pound Sterling Surges on Rate Cut Expectations: GBP/USD Breaks Above 1.3450 Amid Diverging Central Bank Policies

The GBP/USD exchange rate has strengthened to approximately 1.3480 in Friday’s early Asian trading, driven primarily by shifting expectations around US monetary policy. Market participants are reassessing the US Dollar’s near-term prospects as rate reduction probabilities for 2025 climb higher.

Fed Rate Cut Expectations Pressure the Greenback

The CME FedWatch tool indicates financial markets are now assigning roughly a 15% probability to a Federal Reserve rate cut at its January meeting. This growing conviction reflects the central bank’s potential policy shift following the Greenback’s dramatic 2024 performance—the worst annual showing in eight years.

Market sentiment has been further influenced by speculation surrounding Fed Chair Jerome Powell’s successor, with incoming President Trump signaling preference for a dovish monetary policy stance. These comments have rekindled debates about institutional independence, adding downward pressure to USD valuations across major currency pairs.

Bank of England’s Measured Approach Supports Cable

In sharp contrast, the Bank of England is pursuing a gradual interest rate reduction cycle. The central bank lowered its key rate from 4.0% to 3.75% in December, bringing borrowing costs to their lowest level since mid-2022. Governor Andrew Bailey indicated that while future cuts remain likely, the pace will necessarily slow with each adjustment.

The Policy Divergence Framework

The divergent paths of US and UK monetary authorities are creating favorable conditions for Pound Sterling. While the Fed is expected to engineer at least two rate cuts this year, the BoE’s more cautious approach suggests fewer reductions ahead. This policy differential typically supports currencies from economies signaling higher relative yields—a structural advantage the Pound has established.

Traders monitoring GBP/USD dynamics should note that the 1.3450 level now represents a near-term support area, with 1.3480 establishing itself as resistance for the ongoing session. The pair’s trajectory will likely remain sensitive to any Fed communications and UK economic data releases.