Sterling Surges Past 1.3450 as Divergent Rate Paths Between Fed and BoE Drive GBP/USD Higher

The GBP/USD exchange rate is currently trading around 1.3480 during Friday’s Asian morning hours, reflecting growing divergence between US and UK monetary policy stances. This movement highlights how differing central bank trajectories are reshaping currency valuations in the foreign exchange markets.

Fed’s Dovish Pivot Weakens the Dollar

The primary driver behind Sterling’s strength is the widespread expectation that the Federal Reserve will implement at least two interest rate cuts throughout 2025. The CME FedWatch tool indicates that markets are currently assigning approximately 15.0% probability to a Fed rate reduction at the upcoming January policy meeting. This dovish outlook represents a sharp reversal from 2024, when the US Dollar closed the year with its steepest annual decline in eight years.

Adding to these rate-cut expectations is speculation surrounding the incoming Fed leadership. With Fed Chair Jerome Powell’s term concluding this year, President Donald Trump has signaled his preference for a successor who will maintain lower interest rates and avoid policy disagreements with the administration. Trump’s recent comments about expecting the next Fed Chairman to keep rates low and remain aligned with his administration have raised questions about central bank independence among investors and policymakers alike.

Philadelphia Fed President Anna Paulson is scheduled to deliver remarks this weekend, which could provide further clarity on the Fed’s policy trajectory.

Bank of England Takes Gradual Approach

In contrast, the Bank of England has signaled a measured approach to future rate decisions. At its December meeting, the BoE reduced benchmark rates from 4.0% to 3.75%—marking the lowest level in nearly three years. Governor Andrew Bailey indicated that while rates are expected to follow a gradual downward path, each subsequent cut will require closer examination of economic conditions.

This measured pace from the BoE provides relative support to Sterling, as the divergence between a potentially aggressive Fed and a cautious BoE creates favorable conditions for GBP/USD. For those tracking currency pairs like 16 GBP to USD conversions, this policy divergence remains a critical factor influencing near-term exchange rate dynamics.

The contrast between the two central banks’ positioning underscores how monetary policy decisions continue to be the primary force reshaping currency markets in the early part of 2025.