• GBP/USD edges lower as the US Dollar finds mild support in holiday-thinned trade.
• Fed easing expectations into 2026 keep the broader US Dollar bias soft.
• BoE’s measured approach to easing in 2026 supports Sterling, as officials push back against expectations of aggressive cuts.

The British Pound (GBP) softens against the US Dollar (USD) on Wednesday, with the Greenback finding mild support amid reduced liquidity during the shortened US holiday session. At the time of writing, GBP/USD trades around 1.3500, easing slightly after briefly touching an intraday high near 1.3534, its strongest level since September 19.

Markets showed a muted response to the latest weekly US labor market data, which offered mixed signals. Initial Jobless Claims fell to 214K from 224K in the previous week, undershooting the 223K market forecast. Meanwhile, Continuing Jobless Claims climbed to 1.923 million from 1.885 million, while the four-week average of Initial Claims edged down to 216.75K from 217.5K.

Despite a short-term bounce, the US Dollar remains under sustained pressure as expectations for further monetary policy easing by the Federal Reserve (Fed) into 2026 continue to weigh on the Greenback, keeping GBP/USD well supported. The US Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, trades around 97.95, hovering just above its lowest level since October 3.

Markets broadly expect the Fed to keep interest rates unchanged at its January meeting, with the CME FedWatch Tool showing only a 13% probability of a rate cut. Speaking after the December policy decision, Fed Chair Jerome Powell said the central bank is “well positioned to wait and see how the economy evolves.” Still, investors anticipate a return to easing later in the year, with markets currently pricing in two rate cuts in 2026.

On the UK side, the monetary policy outlook remains broadly supportive for Sterling. The Bank of England (BoE) is expected to proceed cautiously in 2026 after signalling at its December meeting that, while interest rates could move lower over time, future policy decisions are becoming a “closer call,” tempering expectations for an aggressive easing cycle.

According to forecasts from UBS, the BoE is likely to deliver two additional 25-basis-point rate cuts in 2026, potentially in the first half of the year, which would take Bank Rate toward around 3.25%. UBS adds that lingering services inflation and still-elevated wage growth could slow the pace of easing.