GBP/USD Price Forecast - Pound tests 1.37 as Dollar slide, UK data surprise and Fed risk collide

GBP/USD: Sterling Presses 1.37 As Dollar Story Frays From Inside

GBP/USD price action: four-month highs, key band at 1.3660–1.3700

GBP/USD is trading in the 1.3660–1.3690 zone, its strongest level since mid-September 2025, after a sharp squeeze higher from the 1.3400 base. Intraday, the pair bounced from 1.3642 and printed highs just under 1.3700, keeping the short-term structure clearly bullish. The rally has added roughly 2% in a few sessions and put price well above its short- and medium-term moving averages, with a rising trendline from the 1.34 area still intact. The next obvious upside pivot is the cluster around 1.3788–1.3800, followed by 1.3900 and 1.4000, while the first meaningful support now sits at 1.3650, then 1.3615–1.3600 and deeper at 1.3573–1.3540. As long as GBP/USD holds above 1.3500–1.3510 on pullbacks, the market is rewarding dip-buying rather than chasing strength.

Dollar side: DXY break, intervention rumors and Fed credibility erosion

The latest leg higher in GBP/USD is primarily a Dollar story. The US Dollar Index has dropped about 0.4% to the 97.00 area, having already tagged four-month lows at 96.94, after breaking below a rising wedge and slipping under the 50-day moving average around 97.70–97.80. That break flips the short-term bias in the USD from neutral to negative, with downside levels now lining up at 96.25 and 95.60. The move is being amplified by unhelpful headlines rather than weak data. Markets were hit by talk of joint attention to the yen exchange rate after the New York Fed’s markets desk contacted institutions about JPY trading, a signal traders framed as groundwork for coordinated intervention. That alone was enough to knock the Dollar lower as positioning was heavy after months of “long USD versus everything” trades. More structurally, investors are uncomfortable with the constant noise around the central bank’s independence and the wider fiscal situation. A high-profile European pension fund liquidating roughly $100 million of Treasuries on debt-sustainability concerns is not a large number in itself, but it speaks to a broader theme: foreign capital is no longer willing to treat US assets as unquestioned safe havens at any price. In this environment, any policy misstep or rhetorical escalation from Washington becomes a direct headwind to USD, regardless of near-term macro strength.

US data: strong durable goods, solid jobs, but market refuses to reward USD

Macro numbers out of the US are not the problem. November Durable Goods Orders rose 5.3% month-on-month after a −2.1% drop, while core capital goods gained 0.5% following 0.1%, beating a 0.3% forecast. Underlying investment is still expanding, helped by orders for machinery, electrical equipment, computers and communications hardware. Earlier in January, non-farm payrolls surprised to the upside, forcing some investors to rethink aggressive “Sell America” positioning built late in 2025. On paper, that combination of robust capex and resilient labour should support USD and cap GBP/USD upside. The market, however, is discounting the data because it assumes the rate story is already peaking. With the policy rate sitting in the 3.50%–3.75% corridor and real yields sliding, the curve still prices around 40–45 basis points of cuts into year-end. Unless the Federal Reserve pushes back hard against that easing path, each strong data point simply delays cuts rather than erasing them, and the Dollar continues to trade as a weakening carry currency rather than a growth asset. For GBP/USD, that means dips sparked by good US data are being bought, not sold.

Fed path and rate expectations: neutral decision, asymmetric risk for USD

The upcoming Fed decision is the next hard catalyst for GBP/USD. The baseline scenario is simple: no change, with the target range left at 3.50%–3.75%. The risk is not the decision but the message. Rate futures still price the first 25-basis-point cut between March and June and another one later in the year. One major house is openly forecasting cuts in both March and June, targeting a 3.00%–3.25% range by mid-year. Others are more cautious and see cuts pushed into the second half of 2026. The asymmetry is clear: if Chair Powell sounds dovish, DXY has further room below 97.00; if he sounds hawkish and explicitly leans against early easing, USD can stage a sharp counter-rally. From a GBP/USD perspective, the skew still favours Sterling as long as markets doubt the Fed’s willingness to keep real rates restrictive. Even if the first cut is delayed, the direction of travel is still lower, and history shows that once the market believes the cutting cycle is coming, the Dollar tends to weaken ahead of the first move rather than after it.

UK macro: retail and PMI surprise higher, BoE cuts pushed to the right

On the UK side, the latest data run gives GBP a credible domestic backbone. December Retail Sales rose 0.4% month-on-month after a −0.1% decline, beating expectations for another 0.1% drop. Core Retail Sales, excluding fuel, gained 0.3% after a revised −0.4% the prior month, sharply better than the consensus call for a −0.2% fall. At the same time, the Composite PMI climbed to 53.9, a 21-month high and firmly in expansion territory. Taken together, these figures show the UK consumer is still spending and the private sector is not rolling over. That mix complicates the Bank of England’s job: inflation is still running above target and activity is no longer weak enough to justify rapid easing. Markets now assume the BoE will sit tight at the next meeting and only deliver a first 25-basis-point cut around mid-year, with risk of a further delay if the data stay firm. Fewer, later rate cuts in London versus persistent expectations of cuts in Washington is exactly the relative story that favours GBP/USD upside, especially when spot is already testing four-month highs.

BoE versus Fed: relative policy drives medium-term GBP/USD repricing

Banks looking across 2026 are broadly aligned on that relative picture, even if their precise targets differ. One major lender expects modest further gains in GBP/USD from here as long as the Fed’s independence remains questioned and the market continues to frame the Dollar as the weak leg. Another sees scope for the pair to edge toward the low-1.37s and potentially re-test the late-July 2025 high just under 1.38 by year-end. A more Dollar-constructive house still projects GBP/USD at 1.34 around the end of 2026, arguing that once concerns around central-bank interference fade and US yields stabilise, the Dollar’s safe-haven function will reassert. The signal is clear: nobody is calling for a structural Sterling collapse; the debate is whether the pair grinds higher from 1.36 into the 1.37–1.38 band and then stalls, or overshoots that zone if the Fed disappoints Dollar bulls again. With the current spot near 1.3690, the risk-reward for medium-term bears is poor unless Fed communication turns decisively more hawkish.

Sentiment and flows: “Sell America” trade meets positioning fatigue

The late-2025 pattern was straightforward: sell USD on every bounce, buy GBP/USD on every dip toward 1.34. That trade brought price to today’s 1.3660–1.3690 range. Now, the narrative is more nuanced. Strong US employment and investment data have forced some systematic and discretionary players to trim outright Dollar shorts, and risk-off bursts tied to tariffs or geopolitical scares still trigger USD buying. At the same time, ongoing concerns about tariffs on European goods, threats to NATO arrangements, and public talk of “armadas” heading toward conflict zones undermine confidence in US assets as a stable store of value. Foreign investors cannot hedge political headline risk as easily as rate risk, and the result is more cautious allocation to Treasury paper and Dollar-denominated credit. That capital-flow overhang is negative for USD, even if the macro story tries to pull in the other direction. For GBP/USD, the implication is that pullbacks driven solely by US data, not by a genuine shift in Fed reaction function, are more likely to fade than to start a new downtrend.

GBP/USD technical structure: trendline intact, resistance band in play

Technically, GBP/USD remains in a well-defined uptrend from the 1.3400 base. On the daily chart, price is trading comfortably above its key moving averages and respecting a rising trendline that currently crosses just above 1.3500. Momentum has cooled from overbought but remains constructive, with RSI around the mid-60s, consistent with a healthy trend pause rather than a top. Short-term, the market has built a support shelf between 1.3615 and 1.3650, aligning with the first Fibonacci retracements of the 1.3400–1.3680 leg. Below that, 1.3573 and 1.3540 mark deeper retracement levels, while 1.3507 and the underlying trendline form the decisive line in the sand for bulls. On the upside, the 1.3700 figure is an obvious psychological barrier, backed by the July 1 high at 1.3788 and then 1.3800. Above 1.3800, air pockets open towards 1.3900 and 1.4000, but those zones are unlikely to be reached without a fresh impulse from either a dovish Fed or another upside surprise in UK data. As long as price holds above 1.3500–1.3510 on closing basis, the technical message is simple: GBP/USD remains a buy-the-dip market, not a short-the-rally market.

Short-term trading map: levels that matter for GBP/USD in the next week

For tactical traders, the near-term battleground is tight. On the topside, a clean break and daily close above 1.3700 would open a run toward 1.3788 and potentially 1.3800, especially if the Fed fails to lean against easing expectations. That move would likely drag RSI back into overbought territory and invite profit-taking into the 1.38 handle. On the downside, a slip back below 1.3650 would bring 1.3642 and then the 1.3615–1.3600 band into view; that zone is the first serious test of dip-buyer conviction. A decisive break under 1.3573–1.3540 would signal that the post-1.34 leg is exhausted and that a broader consolidation between roughly 1.34 and 1.37 is underway. Given the current macro mix, the higher-probability scenario before the Fed meeting is a noisy range between 1.3615 and 1.3700, with intraday spikes around US data releases and any additional intervention headlines in JPY. Directional conviction will likely only emerge once Powell has reset expectations at the press conference.

Medium-term valuation: is GBP/USD already rich at 1.36–1.37?

From a valuation perspective, GBP/USD is no longer cheap, but it is not obviously overpriced either. The pair has retraced a meaningful portion of its prior decline and now trades near levels that large banks were flagging as year-end targets only a few weeks ago. The structural Dollar story still argues against an aggressive mean reversion lower: US fiscal deficits are large, political noise is high, and the rest of the world is slowly diversifying away from pure Dollar reserves. At the same time, the UK is hardly risk-free: growth is modest, public finances are stretched, and the BoE must balance inflation control against an electorate fatigued by years of tightening. That twin-deficit backdrop on both sides produces a messy equilibrium where relative policy and data surprises dominate. At 1.3660–1.3690, GBP/USD is pricing a modest UK advantage over the next 6–12 months, not a heroic Sterling story. To argue for a sustained move through 1.40, the market would need evidence that the BoE can normalise without crushing the economy while the Fed is forced into an earlier and deeper cutting cycle than currently assumed. That is not today’s baseline.

Risk balance: what could break the GBP/USD uptrend

The most acute downside risk for GBP/USD is a credible reassertion of Fed independence and a harder line on inflation. If the central bank signals that cuts will only arrive once core inflation is convincingly back to target and labour markets show genuine slack, the market will be forced to reprice the entire curve, lifting real yields and pulling capital back into Dollar assets. In that scenario, DXY could reclaim the 97.70 area and squeeze toward 98.50–99.00, driving GBP/USD back towards 1.35 or below. A messy global risk-off episode driven by tariffs or geopolitical escalation could have a similar effect, as investors liquefy positions and rush into USD and Treasuries despite misgivings about US policy. On the UK side, a negative shock to retail spending or PMIs—anything that undermines the story of resilient demand—would bring forward BoE cut expectations and remove some of Sterling’s rate-differential support. None of these shocks is visible in the data right now, but they are the scenarios that would justify abandoning the current buy-the-dip approach.

Verdict on GBP/USD: bullish bias, buy on dips rather than chase the spike

Having integrated the macro, policy and technical backdrop, the conclusion is straightforward. The Dollar is under pressure from a combination of political risk, doubts about central-bank autonomy and forward-priced easing, even as the hard data stay reasonably strong. The UK, meanwhile, is delivering upside surprises in Retail Sales and PMI while the BoE is under no immediate pressure to cut, leaving Sterling with a relative advantage. Technically, GBP/USD is trending higher with a rising structure from 1.3400, a firm support ladder down to the 1.3540–1.3500 zone, and clearly defined resistance at 1.3700 and 1.3788–1.3800. On that basis, the stance is bullish and the rating is Buy, but with discipline on entry: the better trade is buying pullbacks into 1.3615–1.3580 with a medium-term target around 1.3788–1.3800 and a protective line near 1.3500, rather than chasing breakouts above 1.37 into resistance. Only a decisive break below 1.3500 or a hard hawkish pivot from the Fed would justify downgrading GBP/USD to Hold or flipping outright bearish at current levels.

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