GBP/USD Surges Past 1.3450 as Fed's Dovish Pivot Contrasts With BoE's Measured Rate Cuts

The Pound Sterling continues to outperform against the US Dollar, with GBP/USD trading near 1.3480 in early Asian hours on Friday. The divergence stems from markedly different monetary policy trajectories on either side of the Atlantic, where market participants are increasingly pricing in multiple rate reductions from Washington while London signals a more cautious approach.

Policy Divergence Favors the British Pound

The Bank of England (BoE) recently implemented its latest rate cut, bringing borrowing costs from 4.0% down to 3.75% in December—marking the lowest level since early 2022. Governor Andrew Bailey indicated during the subsequent press briefing that the downward adjustment cycle would continue gradually, though each decision would require closer scrutiny. This measured stance contrasts sharply with growing expectations of more aggressive moves from the Federal Reserve.

The U.S. Dollar has already suffered its worst annual performance in eight years as 2025 concluded, reflecting weakened confidence in the currency amid anticipated policy easing. Market pricing via the CME FedWatch tool currently reflects approximately 15% probability of a Fed rate cut at January’s policy meeting alone.

Fed Leadership Uncertainty Adds Pressure on USD

Beyond rate expectations, speculation regarding Federal Reserve leadership succession is intensifying currency volatility. President Trump has signaled his preference for a Fed Chair successor to current leader Jerome Powell—whose mandate concludes this year—who would maintain accommodative monetary conditions. Trump’s public statements that he expects the next Chair to keep rates suppressed and align with his administration’s preferences have triggered investor concerns about institutional independence at the central bank.

Philadelphia Federal Reserve President Anna Paulson’s forthcoming remarks may provide additional clarity on the Fed’s near-term direction, potentially reinforcing either USD headwinds or offering temporary relief.

Cable Strength Reflects Asymmetric Rate Outlook

The GBP to USD exchange rate strength reflects fundamental positioning around interest rate differentials. While the BoE navigates a gradual cutting cycle with careful consideration at each juncture, the Fed appears poised for a more pronounced easing path. This policy asymmetry continues supporting Sterling’s upside momentum above the 1.3450 technical level, with broader carry trade dynamics favoring higher-yielding currencies until divergence narrows.