GBP/USD Targets 1.4000 as U.S. Dollar Breaks Down on Deficit Surge and Fed Cut Bets

Pound breaks to three-year high as USD erodes on fiscal fear and rate cut bets

The GBP/USD currency pair has surged toward a three-year high at 1.3788, driven not by UK macro strength but by a deepening erosion of the U.S. dollar’s structural standing. The greenback has now broken to its lowest level since Q2 2022, dragged lower by a perfect storm of dovish Fed language, ballooning deficit risks, and sustained pressure from risk-on positioning. The U.S. Dollar Index (DXY) dropped under 97.00 for the first time in over three years. Technical positioning shows DXY has failed at both the 97.80 and 98.20 resistance zones, suggesting any reversal attempt is likely to meet intense selling.

Soft U.S. data and Powell’s ambiguity add pressure on dollar side of GBP/USD

The July JOLTS report showed job openings rising to 7.769 million, the highest in seven months and above forecasts of 7.3 million, but this was tempered by weak manufacturing. The ISM PMI held at 49.0, its fourth month in contraction, and market attention turned sharply to consumer data. Most notably, PCE spending contracted more than expected, helping solidify a 74% probability of a September Fed rate cut, with a non-negligible 26% chance for July, according to swaps data. Powell’s language from the Sintra Forum — "modestly restrictive" and "wouldn’t rule anything out" — added to dovish pressure, especially as Trump’s $3.3 trillion deficit expansion bill clouds longer-term U.S. fiscal credibility.

BoE’s Bailey pivots dovish but pound resists due to macro divergence

While Governor Andrew Bailey hinted at a softening labor market and acknowledged downside risks to UK rates, the pound has not collapsed. That’s because UK data, though muted, is not deteriorating at the pace seen in the U.S. The UK Manufacturing PMI remains at 47.7, unchanged from May, and while below the 50 expansion line, it beat expectations. More notably, Q2 GDP expanded 0.7%, marking a robust quarterly print given Europe’s sluggish baseline. Bailey’s dovish tilt is perceived more as a stabilization narrative than an emergency response, especially as the BoE is no longer viewed as materially behind the curve. The monetary spread against the Fed is starting to flip in the pound’s favor.

GBP/USD technical levels suggest breakout scenario above 1.3800

Price action in GBP/USD has consistently respected higher-low structure since bottoming in April. Cable retested support at 1.3722 after failing at 1.3788 and bounced cleanly, forming a bullish continuation pattern. A strong close above 1.3777 would expose the psychological magnet at 1.3800, which has capped all price action since October 2021. Technicals remain favorable: the RSI holds near overbought at 68.5 but has not yet reversed, and MACD momentum remains elevated. If bulls push through 1.3800, the next upside target is 1.4000, with interim resistance at 1.3836. To the downside, key support remains layered at 1.3700, followed by 1.3631 and the 20-day SMA at 1.3584. Any failure to hold above 1.3700 would negate the breakout thesis.

Fiscal and geopolitical flows drive GBP/USD divergence

The sharp divergence between fiscal outlooks in the U.S. and U.K. is now becoming a core FX theme. Trump’s proposed spending bill — nicknamed the "One Big Beautiful Bill" — involves $3.3 trillion in stimulus over a decade, reigniting debt fears at a time when Treasury yields are already strained. Simultaneously, the U.K. is reaping reputational benefits from a U.S.-U.K. trade deal that just lowered tariffs on critical industrial imports. That agreement, effective July 1, has helped lift UK industrial asset flows and adds credibility to UK’s macro narrative in a volatile trade environment. The pound’s 6% quarterly gain is the strongest since Q4 2020.

Momentum building as GBP/USD correlation to risk improves

Risk-on appetite is back in focus, and GBP/USD is trading with increasing correlation to broader risk proxies like the Nasdaq and Bitcoin. This is unusual for a pair traditionally viewed as yield-sensitive, but current rate dynamics are subdued in favor of fiscal outlook and global positioning. With the Fed seen as more likely to ease and the BoE seen as in wait-and-see mode, capital is rotating toward currencies with more favorable political optics and less debt overhang. This explains why sterling has remained firm despite dovish BoE messaging, and why dips continue to be bought near 1.3700.

Verdict: GBP/USD is a buy on dips above 1.3720 targeting 1.4000

Despite near-term exhaustion risk near 1.3788, structural flows favor continued GBP/USD upside. As long as support holds at 1.3700–1.3720, bulls have a clear setup to test 1.3800 and beyond. A breakout opens the path toward 1.4000, a level not seen since May 2021. With macro momentum shifting against the U.S. dollar, GBP/USD is a Buy, with downside risk limited to 1.3630 and upside targeting 1.3836 and 1.4000 over the coming weeks.

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