GBP/USD Price Forecast - Pound Holds the 1.35 Zone as Dollar Weakens into 2026

GBP/USD Holds 1.34–1.35 Range as Dollar Softens into 2026

GBP/USD trades in a 1.34–1.35 consolidation band

GBP/USD is trading around the mid-1.34s–1.35s after failing to extend above the recent swing high near 1.3535. On the short-term chart, GBP/USD sits just above the 50-EMA around 1.3470, with deeper structural support near the 100-EMA close to 1.3340. As long as the 1.3410–1.3470 band holds, dips toward 1.34 are being treated as buy zones, not the start of a new downtrend. The price structure from the autumn lows is still a sequence of higher lows and suggests a grind toward 1.36 rather than a breakdown back to 1.33.

Dollar index capped below 98.70 as markets price 2026 Fed cuts

The dollar backdrop is clearly weakening. The dollar index trades around 97.9–98.1 after bouncing from 97.74, but upside remains capped by the 100-EMA near 98.70. That tells you rallies in USD are being sold, not chased. Futures markets are already pricing at least two U.S. rate cuts in 2026, with the policy rate expected to move from the current 3.50–3.75% band toward roughly 3.00–3.25% next year. Short-term pricing puts the probability of a first cut by March 2026 above 75–85%, a clear medium-term headwind for USD and a structural positive for GBP/USD.

Fed already eased three times; labor data supports a controlled normalization

The U.S. central bank has cut rates three times since September, taking the federal funds range roughly 100 bps below its 2024 peak and parking it around 3.50–3.75%. The latest Non-Farm Payrolls report showed stronger-than-expected job creation, which briefly supported the dollar, but the market is focused on the full-year pattern: softer growth momentum, cooling labor conditions compared to early 2025, and a central bank already well into an easing cycle. The regime has shifted from “higher for longer” to “controlled normalization”, and that gradual erosion of USD carry is a key support for GBP/USD.

Low volatility and equity positioning reinforce a weaker USD profile

The VIX index has dropped toward 11.5, near its 52-week low, compressing options premia across equities and FX. Cheap volatility is encouraging call-option buying on U.S. indices such as the S&P 500, where some houses guide toward an 8,000-point target for 2026. A backdrop of a soft-landing narrative, U.S. GDP growth around 2.1% in Q3 2025, and low volatility typically aligns with a softer dollar rather than a defensive USD bid. That combination supports upside in GBP/USD rather than a return to sub-1.33 levels.

U.K. inflation and BoE stance keep GBP supported versus USD

On the U.K. leg of GBP/USD, inflation remains stickier than in the Eurozone or the U.S., with recent prints still well above the 2% target and prior data near 3.2%. Persistent price pressure forces the Bank of England to keep a hawkish bias while others talk more openly about cuts. Communication from the BoE suggests any easing cycle will be later and shallower than the Fed’s. That relative stance has allowed GBP/USD to hold the 1.34–1.35 region despite illiquid holiday trading. The pullback from 1.3535 to the 1.3480–1.3500 area is a consolidation after a rally, not a structural bearish reversal.

GBP/USD technical map: 1.3340 as line in the sand, 1.36–1.38 as upside zone

Technically, GBP/USD trades just under 1.3500, with immediate resistance near 1.3535 and then around 1.3600 if buyers regain momentum. First support is the 50-EMA at 1.3470, followed by 1.3410 and the heavier 100-EMA near 1.3340. As long as the pair holds above 1.3340, the medium-term pattern of higher lows from the autumn base remains intact and favors a retest of 1.36 and, on stronger dollar weakness, an extension toward the 1.37–1.38 area during 2026.

EUR/USD and USD/JPY moves confirm a broad dollar story

The broader FX tape confirms this is primarily a dollar move, not just a sterling story. EUR/USD trades around 1.176–1.178, above its 50-EMA near 1.1745 and the 100-EMA around 1.1705, grinding higher in a rising channel despite Eurozone growth only around 1.2–1.3% for 2025–2026. USD/JPY trades near 156.4 as the yen remains a favored funding currency. Core Tokyo CPI in December printed at 2.3% year-on-year versus a 2.5% forecast and remains above the 2% target, but markets are unconvinced the Bank of Japan will normalize quickly. That keeps JPY weak and highlights that USD underperformance is selective, with European currencies and GBP better positioned than JPY.

Gold near $4,500 and Bitcoin near $87k reflect rotation, not systemic stress

Gold has pulled back from record highs above $4,500–$4,520 per ounce and is trading in the $4,450–$4,550 band, with recent levels near $4,546.94. This move looks like profit-taking in a thin holiday tape, not a structural top, especially while rate-futures still price multiple U.S. cuts. Many desks treat spot under $4,500 as a tactical entry via call options, a pattern that normally coincides with ongoing medium-term pressure on USD and supports pairs like GBP/USD. Bitcoin trades between $87,000 and $89,000 after ETF outflows of roughly $188.6 million and a drop in whale participation. That is a sizeable correction but not a crash, and fits the story of speculative risk assets digesting prior gains rather than signaling broad risk aversion.

Japan’s mixed data keeps JPY weak and indirectly supports GBP crosses

Tokyo’s core CPI at 2.3% versus a 2.5% forecast and Japan’s November retail trade growing 1.0% year-on-year versus 0.9% expected show an economy that is slow but not collapsing. Despite inflation staying above target for more than a year and a half, the Bank of Japan has not delivered an aggressive tightening cycle. That keeps JPY the preferred funding leg, while higher-yielding currencies such as GBP attract carry and position-taking on any USD correction. The persistent weakness in USD/JPY funding flows indirectly supports GBP/USD because it reinforces the broader pro-risk, anti-USD bias.

ECB anchored near 2% while Eurozone growth stays sluggish but stable

In the Eurozone, the policy picture is more static. The main refinancing rate sits around 2.15%, the deposit rate near 2.00% and the marginal lending facility at 2.40%. Headline inflation runs around 2.2% year-on-year, slightly above October’s 2.1%, with services inflation around 3.5%. That mix—headline near target, services still hot—gives the European central bank cover to stay on hold through most of 2026. Forecasts see Eurozone growth roughly 1.3% in 2025 and 1.2% in 2026, with risks from potential 10–20% U.S. tariffs on EU goods. The result is a euro that is not booming but not broken. A relatively stable EUR/USD around 1.17–1.18 indirectly supports GBP/USD, because broad European currency weakness against USD is capped.

Cross-asset flows: S&P 500 upside and cheap vol align with a softer USD

Cross-asset flows reinforce the same message. U.S. equities are positioned for a constructive 2026, with some forecasts targeting S&P 500 around 8,000 on the back of AI-driven earnings, lower policy rates and a “soft landing” macro profile. With the VIX near 11–12 and index calls relatively cheap, investors are willing to pay for equity upside rather than hoard dollars as a safe haven. In FX, that usually means a weaker USD against higher-beta developed-market currencies, including GBP, and supports GBP/USD holding above 1.34 even in quieter sessions.

Commodity FX and USD/CAD show USD struggling even with WTI near $58.5

Commodity-linked currencies provide another check on the dollar trend. USD/CAD trades near five-month lows despite WTI crude around $58.5 per barrel and Brent near $62.3. Policy divergence between the Bank of Canada and the Fed, with markets expecting earlier or more aggressive cuts from the Fed, is pressuring USD even when oil is not surging. If USD cannot rally meaningfully versus CAD in a high-$50s WTI environment, it is unlikely to dominate GBP at a time when the Bank of England remains relatively tighter.

Short-term sentiment in majors favors GBP over USD into early 2026

Intraday sentiment snapshots are consistent with this alignment. EUR/USD sits near 1.1776, broadly flat on the day but higher over recent weeks; GBP/USD trades around 1.3501, consolidating post-rally; USD/JPY hovers near 156.4 as yen funding remains popular; and commodity pairs like AUD/USD and USD/CAD react mainly to commodities and local policy rather than any new USD strength. The dominant theme remains controlled dollar softness, not a broad rush into USD, which reinforces the constructive stance on GBP/USD.

GBP/USD verdict: structure, policy and flows all point to a bullish bias

Combining price structure, policy differentials and cross-asset signals, the balance of forces favors GBP over USD. GBP/USD around 1.35 trades on a backdrop of a dollar index capped below 98.70, a Fed that has already cut three times in 2025 with at least two more cuts priced for 2026, a Bank of England constrained by inflation still above target, and a global risk environment where equities and gold are supported, not distressed. As long as GBP/USD holds above 1.3340 and buyers continue to defend 1.3410–1.3470, the pair has room to retest 1.36 and then push toward the 1.37–1.38 zone as 2026 unfolds. Based strictly on these numbers and this setup, the stance on GBP/USD is bullish and the pair is a buy, with the 1.33–1.34 area as support and the high-1.30s as a reasonable upside objective if the Fed delivers the easing path already embedded in the curve.

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