GBP/USD has retraced from the 1.3860 peak towards the 1.3700–1.3750 range following a significant rebound in the US Dollar. The recent catalyst was the January FOMC decision along with the unexpected robustness in US producer prices. Headline US PPI increased approximately 0.5% month-on-month, surpassing expectations of around 0.2%. Core PPI increased by approximately 0.7%, compared to a consensus estimate of around 0.2%. The data indicates persistent inflationary pressures, diminishing the immediate need for additional cuts from the Federal Reserve. The Federal Reserve maintained its interest rates with a 10–2 vote, characterizing economic growth as solid and omitting previous references to increasing employment risks. That represents a subtle hawkish shift following three cuts that have already been implemented. Additionally, the White House has identified Kevin Warsh as the favored candidate for the Fed chair position, a decision that markets interpret as favorable for the dollar in contrast to earlier expectations of a more dovish leadership approach. The interplay of a robust PPI, a Federal Reserve that is no longer in a hurry to implement cuts, and the selection of a chair viewed as hawkish has propelled the Dollar Index away from its four-year lows. GBP/USD experienced an immediate reaction, with the pair declining over 100 pips from approximately 1.3860 to the mid-1.37s as profit-taking commenced on overextended long-sterling positions. The political landscape is complex, and it has significant implications for GBP/USD. President Trump has consistently lauded a weaker dollar in public, referring to USD softness as “great,” while his own advisers are now emphasizing the advantages of a strong currency. The ongoing conflict introduces fluctuations within the US rates and foreign exchange landscape. Last week’s abrupt yen carry unwind and dollar decline served as a clear indication of the potential consequences of erratic policy communication. In this context, any indication that the administration might accept a stronger USD to stabilize wider markets lends support to a corrective rebound in the Greenback.
For those trading sterling, this indicates that GBP/USD is caught in a struggle influenced by US political risk, the credibility of the Fed, and the overall global risk sentiment, rather than merely reflecting a straightforward rate differential narrative. Simultaneously, rising tensions in the Middle East, ongoing US–Iran news, and discussions surrounding new sanctions contribute to a risk premium within safe-haven flows, which generally supports the dollar during declines. The inability for the move above 1.38 to extend toward 1.40 can be attributed to this factor, despite the prior structural support for GBP. Recent data indicate a more robust economy than previously anticipated, with growth stabilizing instead of descending into a significant downturn Markets entered this week with an expectation of a cautious stance from the Bank of England, though not overtly dovish Rate cuts remain a possibility for later in 2026; however, the timing will depend on data, and the threshold for immediate easing is elevated. The position enabled GBP/USD to reach new multi-month peaks around 1.3860, a level not observed since late 2021, prior to the recent decline. However, the rally resulted in crowded positioning, making tactical longs susceptible to any USD squeeze. As US data exceeded expectations, sterling bulls opted to secure profits instead of resisting the trend. This behavior accounts for the pair’s decline below 1.3800 and its movement toward 1.3700, occurring without any specific negative developments from the UK. The primary risk in the UK at this moment is the impending decision from the Bank of England regarding interest rates and the division of votes associated with it. A hold with a cautious committee favoring patience will bolster GBP. A surprising dovish shift or strong indications of early cuts would eliminate one of the key supports for GBP/USD.
Traders in the US are confronted with key indicators including ISM manufacturing and services, JOLTs, ADP, non-farm payrolls, average hourly earnings, unemployment rates, and the University of Michigan’s sentiment and inflation expectations. The consensus anticipates NFP figures in the range of 50k to 75k, with unemployment projected at approximately 4.4%. A print significantly exceeding that range, supported by robust wage growth, would confirm the PPI surprise and suggest fewer cuts, thereby reinforcing USD strength and exerting pressure on GBP/USD towards lower supports. A shortfall in jobs and wages would counter this trend, reigniting the dollar-bearish narrative and potentially leading to another examination of the 1.38–1.39 range. The decision and statement from the BoE take center stage in the UK context. If the bank maintains current rates while emphasizing patience and pointing out potential inflation risks, expectations for rate cuts are delayed, providing new support for sterling. If the language strongly emphasizes disinflation and indicates potential earlier easing, those holding long positions in GBP may reconsider, leading GBP/USD to potentially drop below 1.37 with minimal resistance. Considering the substantial positive developments reflected in the price around 1.38–1.39, the risk-reward dynamic leading up to the meeting has become more balanced for sterling.
GBP/USD continues to operate within a larger uptrend, yet it is currently experiencing a corrective phase. The price has recorded two successive weeks of gains, peaking around 1.3860, marking the highest point since October 2021. The recent decline has pulled the pair down into a significant support zone, approximately between 1.3700 and 1.3680. The specified zone encompasses recent breakout levels along with short-term moving averages observed on daily charts. The subsequent significant level is located around 1.3600, with a more substantial demand zone emerging near 1.3500. Multiple analysts highlight the 1.3460–1.3500 range as the critical threshold for the bullish trend. A clean daily and weekly close below 1.3460 would indicate that the recent breakout was a bull trap, suggesting that the larger USD downtrend pause is evolving into a more sustainable dollar recovery. The corrective tone is substantiated by momentum indicators. The daily RSI has retraced from overbought levels exceeding 70, moving toward the mid-range near 50. This adjustment allows for the potential of either a resurgence in upward movement or a more significant pullback, without indicating a complete trend reversal at this stage. The current chart indicates a standard post-rally consolidation rather than a completed bullish formation, provided that the range of 1.35–1.3460 remains intact on a closing basis.
In the short term, the range of 1.3710–1.3730 has served as the initial support zone where buyers are making efforts to uphold the trend. Should that area experience a decisive failure, focus will turn to the 50-day moving average zone around 1.3630–1.3640, along with the psychological level at 1.3600. The deeper tactical demand zone is positioned between 1.3540 and 1.3570, just in front of the structural floor ranging from 1.3460 to 1.3500. On the topside, initial resistance is positioned around 1.3800, succeeded by the recent peak at 1.3860 and subsequently at 1.3920–1.3950. A sustained break above 1.3860 on strong volume would pave the way toward the 1.4000 round number, particularly if the BoE and US data support sterling. Until that breakout occurs, advances into the high-1.38s will entice profit-taking, while declines into the mid-1.36s are likely to draw in dip-buyers who maintain confidence in a medium-term GBP narrative. The threshold for invalidation for the buy-the-dip proponents is distinctly positioned beneath 1.3460. A breach of that floor, especially during a week when both NFP and BoE support the dollar, would suggest a shift towards a range or potentially a new downtrend in GBP/USD. The broader risk appetite stands as a crucial factor intricately linked to the price movements of GBP/USD. During the same week that GBP/USD experienced a halt, global markets processed a significant decline in silver, notable fluctuations in gold, and a retreat in Bitcoin along with other risk assets. At one point, silver experienced a decline of approximately 15% in a single session as speculative long positions were quickly liquidated.
Bitcoin experienced a significant liquidation wave, surpassing a billion dollars in value. When cross-asset volatility spikes, the dollar typically attracts a safety bid, especially in relation to higher-beta currencies. Sterling occupies a position in the moderate range of the risk spectrum; however, GBP/USD typically declines when market sentiment shifts towards a traditional risk-off environment. The increasing geopolitical risk premium stemming from tensions in the Middle East, along with Iran’s rhetoric and the surrounding sanctions discourse, creates a macroeconomic environment that bolsters the Greenback, particularly on days when economic data is neutral. For GBP/USD bulls to reclaim clear dominance, risk assets must stabilize, and the narrative surrounding the conflict should steer clear of further escalation that could trigger forced deleveraging. Analyzing the current situation, GBP/USD has shifted away from the previously prevailing narrative of a one-sided bullish trend for the sterling that characterized earlier in January. The pair is currently operating within a more stable environment where robust US economic data, the selection of a hawkish Fed chair, and geopolitical tensions can all trigger significant fluctuations in the dollar. The UK economy is demonstrating resilience, surpassing initial concerns, and the Bank of England is not hurrying to reduce rates, thereby maintaining a significant rate differential advantage for GBP.
With the price hovering near the 1.37 pivot and significantly above the 1.35–1.3460 structural floor, the risk-reward dynamics continue to support a cautiously bullish outlook on GBP/USD in the medium term. The optimal strategy involves a tactical buy-the-dip approach targeting the range of 1.36–1.37, with a level of invalidation set below 1.3460. Upside objectives are positioned at 1.3860, followed by 1.40, contingent on favorable data outcomes. Considering the packed event calendar and the tumultuous US political environment, it is essential to prioritize position sizing and maintain stringent risk management practices. Overall stance based on the current numbers: GBP/USD is a qualified assessment. Consider purchasing during price declines, maintaining a medium-term optimistic outlook as long as the range of 1.35 to 1.3460 remains intact. However, be aware that a robust NFP report combined with a dovish stance from the BoE could swiftly shift this outlook to neutral or even a sell position if the 1.3460 support level is breached.