GBP/USD exchange rate breaks through 1.35 resistance level in December
The pound dollar exchange rate jumped more than 1% into the 1.33 range on 3 December after the UK services PMI for November was revised higher. Meanwhile, the dollar was undermined by market speculation that the next Fed Chair will adopt a dovish policy approach. A 32,000 drop in US private payrolls during November heightened expectations for Fed cuts, adding further pressure to the dollar.
Following a period of relative calm, the pound firmed against the dollar on 10 December after the Fed cut its lending rate by a quarter point, taking it to its lowest level in three years. Following the widely anticipated move, Fed Chair Jerome Powell suggested policymakers were ‘well positioned to wait’ before pursuing another reduction. However, he noted the labour market could be weaker than expected, while also sounding optimistic that tariff-related inflation may be less persistent, prompting traders to expect more cuts this year.
The pound dollar rate briefly broke through the 1.34 benchmark the following day, with the US currency sinking to a fresh multi-month low as markets continued to digest the Fed’s unexpectedly dovish rate cut. However, the pound’s gains were curtailed by expectations of looming Bank of England (BoE) rate cuts.
The pound edged above 1.34 versus the euro on 16 December as UK unemployment climbed to a four-year high.
Those gains were swiftly erased the next day after the UK’s consumer price index showed inflation cooling from 3.6% to 3.2% in November, well below the 3.5% forecast. The softer-than-expected print sparked increased speculation that the BoE could deliver multiple interest rate cuts in 2026, undermining the pound.
Having traversed the 1.33 range, the pound rose sharply on 22 December, brushing off data showing the UK economy grew by just 0.1% in the third quarter. Instead, the UK currency benefitted from thin Christmas trading conditions, while the dollar was pressured by market expectations that the Fed could cut interest rates further in 2026.
The pound dollar rate edged above the 1.35 resistance level the following day for the first time in around three months.
Despite being a touch softer as the curtain came down on 2025, the pound was still heading for its biggest annual rise against the dollar in eight years. For the year, the pound was up 7.5%, its biggest annual jump since a 9.5% rise in 2017.
The pound dollar rate ended the month around 1.347.
GBPUSD: 3-Month Chart
2026 Outlook
Pound
Following the Bank of England’s (BoE) widely expected decision to lower interest rates from 4% to 3.75% in December, Governor Andrew Bailey said the bank rate is expected to fall gradually in the future. Much depends on how the economy reacts to November’s Budget. While the picture is far from clear, markets don’t expect the BoE to cut rates more than once or twice over the next year – potentially supporting the pound if rates stay higher for longer.
This outlook is supported by OECD (Organisation for Economic Co-operation and Development) inflation forecasts. Despite expecting UK consumer price inflation to ease from an average of 3.5% in 2025 to 2.5% in 2026, it cautioned that headwinds remain.
‘Elevated inflation expectations and potential second-round effects from increases in payroll taxes and the minimum wage, as well as from high food inflation, constitute an upside risk to prices,’ the OECD said, adding this may lead the BoE to maintain higher interest rates, risking slower economic growth.
Given this outlook, Barclays are expecting the next cut in March rather than February, unless economic conditions improve markedly.
However, slower growth and rising unemployment could offset these forces and undermine the pound, because they increase the probability of further BoE easing. According to KPMG UK’s latest Economic Outlook, the UK economy is expected to slow to 1.0% in 2026, down from 1.4% in 2025, and unemployment is forecast to rise to 5.2% in 2026.
Dollar
At its December 2025 meeting, the US Federal Reserve cut its policy interest rate by 0.25% and signalled a measured approach to future policy changes. Markets expect at least two additional rate reductions in 2026 as economic growth cools and inflation moderates further.
Investors broadly expect the dollar to weaken further as other major central banks hold rates steady or hike, and as a new Fed Chair takes charge. Jerome Powell’s successor at the US central bank (expected around May 2026) is likely to herald a more dovish policy tilt – adding further pressure to the dollar.
Projections of dollar depreciation in 2026 are also based on anticipated convergence in global growth rates, as the US economic advantage is expected to diminish with strengthening momentum in other major economies. According to investors, Germany’s fiscal stimulus measures, policy initiatives in China, and improved growth trajectories across the Eurozone are likely to erode the US growth premium that has supported the dollar in recent years.
The dollar could also be undermined if the Fed is forced to admit that the labour market is not in a good place. Economists expect the US job market to suffer from ‘uncomfortably slow growth’ in the first half of 2026, before reversing higher later in the year.