GBP/USD Price Forecast - Pound Tests 1.35: Can Sterling Break Higher as the US Dollar Wobbles?

GBP/USD Price Forecast: Sterling Presses 1.35 As Dollar Confidence Cracks

Macro Landscape And Policy Drivers For GBP/USD

GBP/USD is trading in a tight but aggressive band around 1.3490–1.3535, having wiped out a three-week decline from the early-January high near 1.3568 and turned higher from the 1.3340–1.3355 demand zone. The pair is now leaning directly into a heavy resistance cluster at 1.3500–1.3570, where prior sellers defended the downtrend. The macro backdrop is asymmetric: the US still shows 4.4% annualised GDP and 2.8% y/y core PCE, but the dollar index (DXY) is stuck around 98.25–98.45, while the UK is printing upside surprises in both consumption and PMIs. That gap between US data strength and USD underperformance is exactly why GBP/USD is testing the top of its recent range rather than sitting back near 1.33.

UK Data: Retail Sales And PMIs Put A Floor Under The Pound

The recent leg higher in GBP/USD starts with the UK consumer. December Retail Sales came in far stronger than the “UK demand is rolling over” story implied. Headline sales rose 0.4% m/m after a 0.1% drop in November, against expectations for another -0.1% contraction. The core measure excluding auto fuel climbed 0.3% m/m after a revised -0.4%, beating forecasts for a -0.2% fall. On an annual basis, headline is up roughly 2.5% y/y and core around 3.1% y/y, both comfortably ahead of consensus. That is not a fragile consumer; that is a resilient one. The FX reaction reflects that: each dip toward 1.3340–1.3400 has been bought aggressively, and the market is now pricing in a UK economy that is bending but not breaking.

Forward-looking activity data backs the same message. The UK flash Composite PMI jumped from roughly 51.4 to about 53.9, with both services and manufacturing in expansion territory. For GBP, this matters more than the GDP headlines: it tells you momentum into 2026 is not collapsing. A stronger services PMI in particular fits the retail beat and undercuts near-term recession calls. That combination – a consumer still spending and PMIs turning higher – is exactly why the pound has the confidence to challenge 1.35 again instead of fading back into the low 1.33s.

US Economy: Strong Numbers, Weak Dollar Response

On paper, the US macro set-up should be bullish USD. Q3 2025 GDP printed around 4.4% annualised, while core PCE inflation sits near 2.8% y/y (0.2% m/m). Weekly initial jobless claims are hovering around 200k, only slightly above ~199k the prior week and below the 212k consensus estimate. That mix – solid growth, contained but still elevated inflation, tight labour – usually supports a stronger dollar and a more hawkish Fed profile. Yet the DXY has slipped into a short-term down channel, trading around 98.25–98.45 instead of grinding higher toward 100. The market is clearly not willing to pay a premium for USD purely on macro.

The reason is not the data; it’s the institutional risk. The fight over Fed leadership, the legal attack on Governor Cook, and the perception that monetary policy could become more politicised all feed a “discount” into the dollar. Investors accept that fundamentals justify fewer cuts than are priced, but they hesitate to reprice aggressively while the Fed’s independence is in the headlines. That is why strong numbers like 4.4% GDP and 2.8% core PCE are not translating into a clean USD rally – and why GBP/USD trades near 1.35 with DXY below 99.

Policy Noise And The “Sell America” Risk Premium

The latest US political headlines keep a risk premium on the dollar. The Greenland tariff episode, the back-and-forth over NATO and Europe, and the Supreme Court hearing around Cook have all shown how quickly the White House can inject uncertainty into markets. When Trump backed away from using force over Greenland and suspended the 10% tariffs on several EU countries, the dollar had a brief relief rally. That bounce faded almost immediately as investors focused back on the Fed question and longer-term governance concerns.

For GBP/USD, this backdrop is supportive. The UK is not a model of political calm, but from a markets perspective, the BoE looks far more predictable than a Fed that is being dragged into domestic political conflict. As long as the perception of institutional risk in the US stays elevated, rallies in the dollar are likely to be sold, especially against currencies backed by positive data surprises. That’s exactly what you see in the tape: GBP/USD extends gains on good UK prints, while USD rallies on strong US data are contained rather than extended.

Technical Structure: Key GBP/USD Levels On Weekly And 4H Charts

Technically, GBP/USD has shifted from a clean three-week slide into a constructive bullish pattern. On the weekly chart, the pair rallied roughly 4.3% from the November low into the early-year high near 1.3568, then spent three weeks correcting lower before finding support at the 38.2% retracement of that move around 1.3355. From that level, cable has printed an outside-week reversal higher, a classic sign that real money stepped in aggressively on the pullback. That base at 1.3355 is now the key structural support for the trend.

Resistance, however, is real. The recovery has brought price back into a cluster around 1.3500–1.3502, where the January high-day close and a descending pitchfork parallel converge. A weekly close above this belt would expose 1.3570–1.3573, which aligns with the 78.6% retracement of the prior September drop, and then 1.3648, the 2025 high-week close where the upper channel boundary is tracking. Beyond that, there is scope toward the 1.3749 region, corresponding to the 2022 high, but that requires a clean break and hold above 1.3640–1.3650.

On the 4H chart, the micro-structure confirms the bullish bias. Price is trading above the 50-EMA, the 20/100-period MAs have crossed bullish, and GBP/USD is oscillating around 1.3490–1.3535 with RSI near 60, indicating positive but not overstretched momentum. Immediate support is layered at 1.3445, followed by the 1.3400 region where the 200-EMA and prior demand converge. Those intraday levels define the battleground for short-term traders; the deeper structural line in the sand remains 1.3355 on the weekly.

Dollar Index Structure: Why DXY Weakness Matters For GBP/USD

The DXY profile explains why sterling has room to breathe even with strong US prints. On the 2-hour chart, the index has retreated from about 99.50 down to the 98.25–98.45 area. Price recently tagged a rising trendline near 98.25, where buyers defended the level, as shown by long lower wicks, but the short-term structure is a descending channel within a still-intact broader uptrend. Key support is stacked at 98.25–98.00, then 97.77. Resistance sits at 98.72 and 98.87, which correspond to the 38.2% and 50% Fibonacci retracements of the last leg down, with the 200-EMA acting as dynamic resistance.

RSI on DXY has bounced from near oversold, signalling that downside momentum is slowing, yet the index has not reclaimed any meaningful resistance. For GBP/USD, that means dips are immediately met with dollar selling as long as DXY stays capped under the 98.70–98.90 pocket. Unless DXY can break back above those retracement levels and push toward 99.50 again, the dollar headwind remains in place, and GBP/USD retains a bullish skew.

Trading Bias: Buy GBP/USD Dips While 1.3355 Holds

Putting the macro and technicals together, the balance of evidence still favours GBP over USD at current levels, but this is a “buy dips, not chase every breakout” environment. The optimal risk-reward zone for fresh longs sits on pullbacks into 1.3440–1.3450, with more aggressive buyers looking at the deeper 1.3400–1.3355 band. That area combines intraday moving average support with the key weekly retracement that triggered the outside-week reversal. As long as GBP/USD holds above 1.3355 on a closing basis, the November–January uptrend remains intact, and dips into that zone are more likely pauses than the start of a reversal.

On the topside, the first realistic profit window lies around 1.3560–1.3570, where the 78.6% retracement joins prior supply. If the pair clears that area with conviction and closes a week above 1.3500–1.3502, the path opens toward 1.3640–1.3650, and potentially the 1.3740–1.3750 region if Fed communication stays muddled and UK data continues to beat expectations. In that scenario, traders can afford to trail stops higher and let the trend extend. For now, with spot still wrestling around 1.35, the focus is on scaling in on weakness rather than chasing every spike.

Risk Scenarios That Could Flip The GBP/USD Narrative

The bullish case for GBP/USD is not bulletproof. A few triggers can flip the script quickly. First, a soft sequence of UK data – especially a reversal in retail strength or a sharp drop in services PMI – would undermine the idea that the UK consumer can carry growth, and would push markets back toward a more aggressive BoE easing path. Second, a clearly hawkish Fed pivot, where Powell leans hard against rate-cut expectations to reassert independence and credibility, would give DXY the excuse it needs to break out above 98.90–99.50, squeezing GBP/USD lower.

The technical tripwire remains 1.3355. A decisive break and close below that level would invalidate the November rally structure, expose the 52-week moving average near 1.3268, and then 1.3223. At that point, the pattern would shift from “higher lows and higher highs” into “failed top and deeper correction,” and GBP/USD would move from a buy-the-dip market into a sell-the-rally market. Until that happens, the combination of UK data resilience, DXY weakness around 98.25–98.45, and strong technical support beneath the market keeps the bias intact.

On balance, the current configuration justifies a bullish / buy-on-dips stance on GBP/USD, with 1.3355 as the key invalidation level and 1.3560–1.3650 as the near-to-medium-term upside band as long as UK fundamentals keep surprising to the upside and US policy uncertainty continues to cap the dollar.

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