GBP/USD holds gains near 1.2600 due to thin trading ahead of the New Year holiday

• GBP/USD appreciates as the US Dollar inches lower amid lighter-than-usual trading volumes ahead of the New Year holiday.
• The US Dollar may receive support from a rising hawkish outlook for the Fed's interest rates in 2025.
• The Pound Sterling may face challenges as a surprise split vote within the BoE hints faster pace of monetary easing.

The GBP/USD pair extends its gains for the second consecutive day, trading near 1.2580 during the Asian session on Monday. The upward movement can be attributed to the subdued US Dollar (USD) amid lighter-than-usual trading volumes ahead of the New Year holiday.

However, the GBP/USD pair's potential upside may remain constrained as markets continue to process the US Federal Reserve's (Fed) hawkish stance. Although the Fed reduced its benchmark interest rate by 25 basis points at the December meeting, the latest Dot Plot projections signal two rate cuts in 2025, reinforcing cautious sentiment.

Fed Chair Jerome Powell said earlier this month that Fed officials "are going to be cautious about further cuts" after an as-expected quarter-point rate reduction. The Fed's hawkish message is likely to support the US Dollar (USD) and act as a headwind for GBP/USD in the near term.

The upside for the GBP/USD pair could be capped as the Pound Sterling (GBP) faces headwinds following a surprise split vote within the Bank of England (BoE), where three policymakers supported rate cuts. This suggests a potentially faster pace of easing in 2025.

At its December meeting, the BoE opted to keep interest rates steady at 4.75% while maintaining guidance for "gradual" rate cuts next year. BoE Governor Andrew Bailey commented, "We think a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy, we can't commit to when or by how much we will cut rates in the coming year."