GBP/USD: Sterling Tests 1.35 as 3.75% BoE and Soft Dollar Pull the Pair Higher
GBP/USD: Sterling Holds Near 1.3470–1.3518 Despite a “Hawkish Cut” from the BoE
GBP/USD is trading roughly in the 1.3470–1.3518 band after a two-day vertical move that took the pair to its highest levels since early October and close to a 12-week high. Buyers stepped in aggressively after the Bank of England moved Bank Rate down by 25 bps to 3.75%, but a narrow 5–4 split vote and persistent inflation at 3.2% YoY kept the move from looking like a classic dovish pivot. Four of nine policymakers refused to cut, signalling they still see wage and price pressures as uncomfortably high.
That combination – a small cut, a divided committee, and inflation still 1.2 percentage points above the 2% target – leaves the market reading the BoE as “easing, but reluctantly.” The result is that GBP has not been treated as a funding currency. Instead, GBP/USD buyers are comfortable pushing the pair above 1.3400, with spot trading around 1.3450–1.3480 after an intraday high at 1.3518 and earlier support test at 1.3374.
GBP/USD: UK Growth at 0.1% QoQ Is Weak, but Not Collapsing
On the macro side, the UK is not posting strong data, but it is avoiding outright stagnation for now. Third-quarter GDP printed 0.1% QoQ and 1.3% YoY, exactly in line with forecasts. A small downward revision of Q2 growth from 0.2% to 0.1% was offset by an upward tweak to 2024 data, leaving the year-on-year pace unchanged at 1.3%.
This is anaemic growth, not a boom, and BoE projections still assume activity “comes close to stalling” in late 2025 as tighter financial conditions and the recent Budget hit confidence. That weak backdrop caps how far GBP/USD can run purely on domestic strength.
At the same time, the UK current account deficit narrowed from about £21.2bn in Q2 to £12.1bn in Q3, still sizeable but less extreme. For a currency that traditionally relies on foreign capital inflows to cover a structural external gap, a smaller deficit removes some of the worst-case tail risk for GBP, but it doesn’t change the reality that the Pound remains vulnerable if global risk appetite sours.
GBP/USD: BoE Rate Path – Gradual Cuts, Not a Panic Easing Cycle
Markets now see the 3.75% BoE rate as a staging point, not the terminal level. Inflation has eased from a recent 3.8% peak to 3.2%, but the Governing body itself is guiding toward inflation only converging to 2% around mid-2026. That forces a slow-motion cutting cycle.
Rate markets are pricing additional easing through 2026, but not an aggressive slashing of Bank Rate. The four dissenters on the Monetary Policy Committee – who opposed the latest cut – act as a ceiling on how dovish the BoE can turn in the near term. That “reluctant easing” stance supports GBP on crosses and provides a fundamental backbone for GBP/USD above 1.34, especially when set against a Federal Reserve that has already slashed 75 bps this year and is being pushed politically toward more.
GBP/USD: Dollar Side Weakens as DXY Slips into the 97–98 Range
On the other side of the pair, the USD is losing altitude. The US Dollar Index (DXY) has slid into the 97.70–98.10 band, locked inside a clear descending channel with a pattern of lower highs and lower lows. Sellers defend the region around 98.60–98.70, where a falling trend line and the 50-EMA converge, while the 200-EMA near 99.20 caps any deeper squeeze.
The technical structure on the dollar side is cleanly bearish: RSI holds below 45, momentum is negative, and every rally into resistance is being sold. Positioning is increasingly skewed toward further USD downside as the market leans harder into Fed-easing stories and rotates into gold and high-beta FX. That macro dollar drag is one of the main reasons GBP/USD has been able to climb toward 1.35 even though UK growth is mediocre.
GBP/USD: Fed Policy – Cuts Already Delivered, More Easing Still Priced In
The Fed has already delivered 75 bps of cuts this year and markets are not convinced it will stop there. Implied probabilities show around a 20% chance of another reduction in January and roughly 50% odds of an additional cut by March. Some houses expect two more 25-bp moves in 2026 – for example, one in March and one in June – which would take the cumulative easing even further.
The political backdrop is tilting the same way. A new Fed Chair is expected, and the candidates being discussed are viewed as more growth-oriented and closer to the administration’s preference for looser policy. That pushes investors to see the future Fed as more tolerant of higher inflation, favouring a steeper US yield curve and a weaker USD over time.
Overlay this with rising safe-haven flows into gold – with spot surging toward $4,497/oz recently – and it is clear that the dollar is no longer the sole defensive asset of choice. When gold rallies and DXY trades under 98, GBP/USD has structural room to hold higher levels.
GBP/USD: US Macro – Strong Q3 GDP, But Mixed Activity Data
The latest US dataset is not one-sided, and GBP/USD price action reflects that. Real Q3 GDP came in at 4.3% annualised, beating the 3.3% consensus and topping the prior 3.8% estimate. Under the surface, the GDP Price Index accelerated to 3.7% versus a 2.7% forecast, and core PCE in Q3 rose 2.9%, up from 2.6%. Headline PCE inflation printed 2.8%, moving up from 2.1% in Q2.
Those numbers argue against an emergency cutting cycle from the Fed and help the USD stage brief counter-trend rallies. That is why GBP/USD backed away from 1.3518 and is rotating around 1.3470–1.3480 as traders digest the data.
But the activity side of the US economy is less glossy. Durable Goods Orders dropped 2.2% in October against expectations for a 1.5% fall, after a 0.7% gain in September. Orders excluding defence slipped 1.5%, and core orders (excluding transportation) rose only 0.2%, undershooting the 0.3% forecast and slowing sharply from 0.7%. Industrial production declined 0.1% MoM in October and managed only a 0.2% rebound in November.
Consumer confidence is also wobbling. The Conference Board index dropped to 89.1 in December versus a 91.0 expectation, and the prior month was revised sharply higher to 92.9, making the latest print look even weaker. That cocktail – strong past GDP but softening forward indicators – keeps the bar high for any sustained USD recovery and leaves GBP/USD dips well supported.
GBP/USD: UK vs US Rate Differentials – Sterling No Longer the Clear Funding Leg
The relative policy story matters as much as the absolute rates. With Bank Rate at 3.75% and the Fed already moving lower, the interest-rate gap that used to favour the USD is narrowing. Markets now assume the Fed is earlier and more aggressive in easing than the BoE.
BoE Governor Andrew Bailey has explicitly guided that inflation should be “closer to target” only by mid-2026, which justifies keeping policy tighter for longer. In contrast, the Fed is under direct political pressure to create “easier conditions” well before the US election cycle peaks.
For GBP/USD, that means the pair is no longer trading with the old reflex where any risk-off move automatically sends it sharply lower. As long as the BoE maintains a cautious tone and the Fed leans dovish, carry and rate differentials subtly support GBP.
GBP/USD: Technical Structure – Ascending Channel, Strong Support Around 1.3420–1.3455
Technically, GBP/USD is trading cleanly inside a rising channel on the 4H time frame. Price recently broke through a key resistance zone at 1.3455, which had capped the pair earlier, and then extended toward 1.3510–1.3518. Short-term support is clustered in the 1.3420–1.3455 area:
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The 50-EMA on the 4H chart is rising around 1.3425, acting as dynamic support.
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The prior breakout level at 1.3455 is now first horizontal support.
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A deeper cushion sits at 1.3390, the lower bound of the recent impulsive leg.
On the topside, resistance is layered near 1.3545 and then 1.3595, both mapped from recent swing highs and channel resistance.
Momentum indicators confirm the constructive bias. RSI is hovering around 60–71, which signals strong trend energy without yet flashing an extreme blow-off. Every retracement toward the mid-channel has drawn in fresh buyers, reinforcing the message that the market prefers to accumulate GBP/USD on dips as long as the structure holds.
The only technical risk in the very short term is that price has already tested the 1.35 handle several times in thin, holiday-thinned liquidity. That makes false breaks more likely, but it does not, by itself, invalidate the broader uptrend unless 1.3390 and then the 1.3310 zone around the 200-EMA are taken out.
GBP/USD: Year-End Liquidity, Positioning, and What Can Break the Trend
Seasonality and flows matter now. Volumes are already fading into the Christmas and New Year period, which exaggerates intraday swings. Some of the move above 1.34 is driven by position-clean-up: dollar longs are being trimmed, and funds that were underweight GBP are chasing performance as GBP/USD trades near 2-month and 10-to-12-week highs.
On the risk side, the UK still runs a structural current account deficit, even if it narrowed to £12.1bn in Q3. If risk sentiment turns sharply lower – for example, if US data surprises on the downside and triggers flight-to-quality into Treasuries and the dollar – that external funding gap can quickly come back into focus. In that scenario, GBP/USD can dump back toward 1.3350–1.3390 without breaking the medium-term uptrend, but it would shake out late longs.
The US side also presents two-way risk. If upcoming US data confirm 4.3%-type GDP prints are sustainable and inflation metrics such as core PCE stay near 2.9%, the Fed could resist market pressure for deeper cuts, flattening the curve and giving USD a tactical boost. That would cap GBP/USD below 1.36 and potentially drive a retest of the mid-1.33s.
GBP/USD: Straight Verdict – Bias Bullish, Treat Dips Toward 1.3430 as Buying Opportunities
Putting it all together – BoE Bank Rate at 3.75% with a 5–4 split, UK inflation at 3.2%, GDP grinding at 0.1% QoQ, the Fed already 75 bps into an easing cycle, DXY pinned around 97.70–98.10, and GBP/USD trading in an orderly rising channel between 1.3390 and 1.3595 – the balance of evidence still favours upside for the pair, not downside.
My stance on GBP/USD is bullish – effectively a Buy on dips rather than a Sell or neutral Hold. Levels:
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Preferred action: accumulate GBP/USD on pullbacks into 1.3430–1.3455.
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Upside zone: initial target 1.3545, then 1.3595 if dollar weakness persists.
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Invalidator: a daily close below 1.3355, with follow-through under 1.3310, would downgrade the view from Buy to neutral and signal that the channel has failed.
As long as GBP/USD holds above the 1.3420–1.3455 support cluster and the Fed remains on a softer path than the BoE, the path of least resistance for the pair sits higher, not lower.
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