Sterling Holds Near $1.33 as Markets Weigh Central Bank Outlooks

The British pound extended its advance above $1.335, trading at its strongest level since October 22, as investors brace for an almost certain rate cut from the Federal Reserve, while upbeat UK PMI data and optimism around the budget have added support.

Markets are now pricing in roughly a 90% probability that the Fed will deliver a 25 bps cut on Wednesday, with expectations for another two to three reductions next year as recent data continues to signal a cooling labor market.

In the UK, the Bank of England is increasingly divided ahead of its December 18 meeting.

Four hawkish policymakers remain wary of persistent inflationary pressures, while more dovish members argue that the economy is slowing and the labor market is loosening.

Governor Bailey is expected to cast the deciding vote, and markets also assign nearly a 90% chance of a cut to 3.75%.

Adding to the outlook, the OECD this week projected that the BoE will cut rates twice more to 3.5% by June before pausing its easing cycle.

The British pound extended gains toward $1.33, reaching its strongest level since late October, as investors welcomed an upward revision to November’s UK services PMI while the US dollar softened ahead of an expected Fed rate cut next week.

The services PMI was revised up to 51.3 from 50.5, comfortably above the 50 threshold separating expansion from contraction, while the composite PMI rose to 51.2 from 50.5.

Despite the positive headline readings, business activity slowed and employment fell at the fastest pace since February, according to S&P Global, though prices charged inflation eased to its lowest level since January 2021.

Looking ahead, the Bank of England is widely expected to deliver a 25-basis-point rate cut in December, before pausing amid concerns over potential inflation re-acceleration.

Meanwhile, US markets fully price in a third Fed rate cut in December, with at least two more reductions anticipated next year, adding to the pound’s relative strength.

The British pound slipped to $1.322 on Friday but still gained about 1% for the week, its strongest rise since early August, after investors reacted to the government’s new budget.

Finance minister Rachel Reeves presented her long-awaited budget earlier in the week and defended it against criticism over higher spending and the decision to lift the tax burden to its highest level since World War Two.

The plan aims to raise £26 billion in new taxes to support welfare programs. Investors generally welcomed the budget’s signal of more disciplined borrowing, though the muted market response showed much of it was already priced in, and part of sterling’s rise likely came from traders unwinding hedges set before the announcement.

Looking ahead, the pound may face limited upside as its yield advantage fades and more Bank of England rate cuts loom.

The central bank kept rates unchanged in November, and easing inflation has strengthened expectations of a cut next month.

The British pound stabilized slightly higher near $1.3190 on Wednesday as markets assessed the government’s newly unveiled fiscal tightening plans and an unusually early release of the Office for Budget Responsibility’s forecasts.

Sterling initially strengthened after traders circulated the OBR document, but the move quickly reversed to as low as $1.31243 as investors examined details showing that much of the planned austerity is pushed toward the end of the decade.

The OBR noted a substantial increase in the government’s fiscal buffer to £22 billion, well above expectations, yet downgraded UK growth forecasts due to weaker productivity assumptions and projected higher inflation and wage pressures.

Analysts warned that the backloading of cuts could weigh on the government’s credibility, prompting the pound to trade erratically during Chancellor Rachel Reeves’s budget speech.

GBPUSD increased to 1.32, the highest since October 2025.

Over the past 4 weeks, British Pound US Dollar lost 0.89%, and in the last 12 months, it increased 4.24%.

The pound briefly climbed to $1.31929 before slipping to around $1.314 after the OBR accidentally released key budget figures ahead of Chancellor Rachel Reeves’s speech.

The report showed a larger-than-expected £22 billion fiscal buffer, compared with the £15 billion forecast, but also weaker growth and higher inflation projected for 2026.

The early release sparked sharp market swings, as such data normally appears only after the budget.

The OBR detailed tax changes including higher gambling duties, a levy on properties over £2 million, and a 2-point rise in dividend taxes, adding £26.1 billion in revenue by 2029-30.

Income tax and national insurance thresholds will remain frozen until 2030-31.

Confusion over the premature release, along with higher inflation forecasts, led traders to scale back rate-cut bets and left both gilts and sterling under pressure.

The OBR apologized, saying the link went live “too early” and that it has opened an investigation.