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GBP/USD morning note: Sterling probes 1.35 as BoE cuts cautiously and the dollar stays heavy

GBP

Sterling has extended its advance, with GBP/USD trading around the mid-1.34s to low-1.35s after a sharp two-day rally. The Bank of England cut Bank Rate by 25bp to 3.75%, but the message landed as “easing with restraint” rather than a clean pivot. A narrow 5–4 vote split, with four policymakers opposing the cut, alongside CPI still running at 3.2% YoY, has limited any shift towards pricing an aggressive easing cycle.

UK activity remains soft but not collapsing. Q3 GDP printed 0.1% QoQ and 1.3% YoY, broadly in line with expectations, and revisions did little to change the underlying picture. The Bank still flags a late-2025 slowdown risk as tighter conditions and fiscal headwinds weigh on confidence, which should temper the upside from domestic fundamentals alone.

One modest positive is the external position. The current account deficit narrowed to roughly £12.1bn in Q3 from about £21.2bn in Q2. That reduces some tail risk, although the broader point stands: sterling’s sensitivity to global risk sentiment has not disappeared.

USD

The dollar remains on the back foot. DXY has slipped into the high-97 to low-98 area and continues to trade with a bearish tone, with rallies struggling into the 98.6–98.7 region and broader resistance nearer 99.2. The market is leaning into a “Fed stays dovish” narrative, which is keeping the USD capped and allowing GBP/USD to hold higher levels despite only middling UK data.

Policy expectations continue to do the heavy lifting. The Fed has already delivered 75bp of cuts this year, and pricing still leaves room for further easing in early 2026. The wider political conversation around the future leadership of the Fed adds to the sense that policy could remain growth-supportive, which would typically be USD-negative at the margin.

US data are mixed. Q3 GDP surprised higher at 4.3% annualised, but inflation components were firmer, with the GDP Price Index at 3.7% and Q3 core PCE at 2.9%. More recent activity indicators are less convincing, including weaker durable goods and softer consumer confidence, which keeps conviction low on a sustained USD rebound.

Looking ahead

Key near-term risk for GBP/USD is a shift in rate expectations. For sterling, the market will focus on whether UK inflation proves sticky enough to keep the BoE moving slowly. For the dollar, the question is whether incoming US activity and inflation prints force a repricing of further Fed cuts. Tactically, 1.35 remains the immediate marker, with dips supported while DXY stays pinned below the 98–99 area and UK policy rhetoric remains cautious rather than decisively dovish.