The GBP/USD pair is currently positioned between 1.3430 and 1.3460, following a spike towards 1.3490 and consistently maintaining the 1.3390 to 1.3430 range. The pair has shown three consecutive positive sessions, driven by stronger UK data, a US Dollar Index hovering around 98.60, and a significant shift in global positioning in response to Trump’s tariff threats on Europe regarding Greenland. This is a calculated maneuver: the framework reflects a traditional policy-spread and geopolitical adjustment favoring the pound, with prices stabilizing just below the 1.3500 psychological threshold as buyers consistently engage on each decline toward 1.34. In the three months leading to November, UK employment experienced an increase of 82K, effectively reversing the previous contraction of 17K. This represents a genuine absorption of slack, rather than mere noise. The unemployment rate remains at 5.1%, not achieving the anticipated decline to 5.0% that the market expected. For GBP/USD, this combination indicates that the labour market is softening but remains intact. This mitigates the potential for a labor market downturn that could compel the Bank of England to implement emergency easing measures, while also allowing for a gradual and measured adjustment in policy direction. The current situation clearly explains why the pair has not consistently traded below 1.3380, even in the face of growth concerns and political uncertainty.
The growth in average earnings, excluding bonuses, was 4.5% year-over-year, while total compensation, including bonuses, increased by 4.7% year-over-year. The current unemployment rate stands at 5.1%, indicating that the existing wage profile does not align with a rapid return to 2% inflation levels. In the case of GBP/USD, the market is unable to realistically factor in a swift succession of rate reductions from the BoE while disregarding these figures. The increase in wage growth suggests a higher implied trajectory for UK real rates compared to the US when considering the current inflation levels. One of the fundamental reasons for the buying activity during dips into the low 1.34s is the perception in the cash market that the central bank will need to maintain a tighter stance than what growth alone would warrant. In December, the headline CPI in the UK rose to 3.4% year-over-year, surpassing the consensus estimate of 3.3% and the previous figure of 3.2%. In the latest data, prices increased by 0.4% month-on-month, following a decline of 0.2% in November. Core CPI stands at 3.2%, which is 120 basis points above the target. The current macroeconomic factor of utmost significance for GBP/USD is paramount. Inflation is no longer on a downward trajectory; it is stagnating at a high level. This challenges the narrative surrounding early, bold reductions from the BoE and compels traders to adjust their expectations for a more gradual easing path. The gradual reduction in monetary policy in London, coupled with a softening approach from the Fed in Washington, has resulted in an increased GBP–USD rate spread that favors the pound. This dynamic is precisely what the price movement around 1.3430–1.3460 indicates.
The recent data on private-sector employment in the US indicates that ADP weekly jobs increased by 8,000, a decrease from the prior figure of 11,300. Moderate performance observed, with no signs of a downturn. The essential factor is the impact this has on Federal pricing. Current market expectations indicate approximately two Federal Reserve rate cuts in 2026, with the initial adjustment now anticipated in June, rather than occurring earlier in the year. This maintains the stability of the DXY, yet fails to establish a compelling bullish narrative for the USD. In the UK, the headline CPI stands at 3.4%, with core inflation at 3.2% and wage growth ranging from 4.5% to 4.7%. This situation leaves the Bank of England with limited flexibility to implement rapid cuts without jeopardizing its credibility regarding inflation. In the case of GBP/USD, the policy divergence is clear: with the Fed leaning towards cuts and the BoE adopting a more cautious stance, the pair is likely to maintain a structural bid on dips. The US Dollar Index is currently positioned around 98.59, maintaining its proximity to the 0.236 Fibonacci retracement level at 98.547. The price action has shown several spinning tops and doji candles just above that level, indicating that sellers are being absorbed without a reversal occurring. The upward trendline linking the latest higher lows remains in place, offering dynamic support, as both short- and long-term moving averages converge and the RSI hovers around 50. If DXY surpasses 98.729 (0.382 Fib), it may approach 98.876 and 99.022; however, while it remains confined within this tight range, it does not pose a significant challenge to GBP/USD. In the current landscape, robust UK inflation and wage figures are at the forefront, clarifying why the spot is approaching the 1.3450 level instead of retreating to 1.33.
Trump’s tariff threat is specific and has the potential to influence market dynamics. From 1 February, imports from Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands, and Finland will incur a 10% duty, which will increase to 25% from 1 June in the absence of an agreement regarding Greenland. This represents a direct tax on European exporters, while simultaneously posing a significant threat to the political stability between the US and Europe, as well as undermining investor confidence in US policy. Investor behavior has become evident: there is a withdrawal of capital from US assets and the dollar, with a shift towards European currencies and gold. The VIX is currently at its yearly peaks, US assets are experiencing sell-offs, and GBP/USD stands out as a prominent liquid indicator of this trend. The pair’s capacity to ascend to approximately 1.3463, achieving daily gains close to 0.30% despite lackluster UK growth reports, indicates that geopolitical factors are currently overshadowing domestic macroeconomic conditions in the immediate term. In the past three sessions, GBP/USD has consistently maintained its position around the 1.3430 level. During one session, the pair maintained a position above 1.3430 throughout Asia and Europe as the market processed mixed labor data: stable unemployment at 5.1%, persistent wage pressures, and a softer growth environment. Another session elevated to 1.3460–1.3490 as traders sold off the USD following tariff news and reports of turmoil in Japanese bonds, resulting in increased volatility measures. Despite a decline in enthusiasm and a shift towards less aggressive comments from the US, the pair’s pullbacks were contained within the range of 1.3430–1.3450, indicating strong dip-buying interest. For a market that was, just two weeks prior, contemplating a retest of 1.33, this represents a significant shift in positioning.
The current state of the UK economy is concerning. Wage growth is experiencing stagnation in real terms, activity indicators are showing softness, and sentiment remains fragile. The Bank of England finds itself in a challenging position, contending with a headline inflation rate of 3.4% while facing sluggish economic growth. That is why GBP/USD is not experiencing a significant upward trend but is instead fluctuating within a tactical range. On one hand, persistent prices and stable wages hinder substantial easing measures and bolster the pound. The presence of lackluster growth limits the extent to which the market can elevate rate expectations, which in turn influences GBP/USD dynamics. In practical terms, this indicates a working range with support levels between 1.3390 and 1.3430, while resistance is positioned around 1.3490 to 1.3505 in the short term. Macro catalysts will ultimately determine which side will break first.