The Pound Sets the Rules. Forecast as of 26.12.2025 | LiteFinance
The Christmas rally in US stock indices, investors’ focus on positive signals from the UK economy, and a weaker US dollar are allowing GBP/USD bulls to stay in control. Let’s discuss this and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The UK economy is cooling.
- The Bank of England may cut the repo rate to 3%.
- The S&P 500 rally is supporting the pound.
- Buying GBP/USD above 1.35 remains relevant.
Weekly Fundamental Forecast for Pound Sterling
Markets hear only what they want to hear. They brush aside negative signals from the UK economy and warnings about aggressive repo rate cuts by the Bank of England. Yet as soon as even mildly positive news appears, GBP/USD jumps sharply. Thus, the pair climbed to a three-month high as investors focused on positive factors, the Christmas rally in US equities, and the weakness of the US dollar.
At first glance, weak UK retail sales data should have weakened GBP/USD‘s upward momentum. In November, sales fell for the second month in a row. Consumers account for about 60% of GDP, so this trend points to economic stagnation in the fourth quarter. Still, markets kept buying the pound.
Central-Bank Rate Changes
Source: Bloomberg.
Investors also paid little attention to a Bloomberg survey showing that about 52% of respondents expect the repo rate to fall to 3% or lower by the end of the cycle, up from 38% in September. This view differs from futures market expectations of just one rate cut by the Bank of England in 2026, putting the pound in a relatively stronger position versus the US dollar.
In December, the BoE cut borrowing costs to 3.75% amid a divided committee. Five members voted in favor, four against. This time, Andrew Bailey sided with the doves, despite taking a hawkish stance in November. The reasons lie in slower inflation at 3.2%, rising unemployment to 5.1%, and other weak UK economic data.
Nevertheless, once the Office for National Statistics revised third-quarter GDP growth to 0.1%, sterling strengthened.
UK Bond Yield Dynamics
Source: Bloomberg.
In my view, external factors are the main drivers of the GBP/USD rally, particularly strong global risk appetite and a weaker US dollar. Ahead of Christmas, the S&P 500 set its 39th record of 2025, while higher UK bond yields compared with US Treasuries make the pound a risk-sensitive currency that reacts quickly to moves in equity markets.
The Bank of England may cut rates two or three times in 2026 instead of the single cut priced in by derivatives. However, the Fed could act far more aggressively. Donald Trump is expected to push the new Fed chair to reduce borrowing costs to nearly 1%. A different central bank head would not suit the US president. If these ambitious plans are implemented, the US dollar is likely to continue weakening against major global currencies.
Weekly Trading Plan for GBP/USD
After hitting the first of two previously set long targets at 1.35 and 1.358, GBP/USD edged higher and then pulled back. Failure to hold above 1.35 would open the door to short-term selling, targeting 1.3445 and 1.3425. Otherwise, the focus remains on buying.
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
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
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