GBP/USD Price Forecast - Pound Tests 1.35 Ceiling as UK Data Beat and Fed Cut Odds Undermine the Dollar

GBP/USD: Sterling Pressures 1.35 While Dollar Loses Policy Premium

GBP/USD Trading Zone and Market Structure

GBP/USD is trading in the upper band of its recent range, sitting around 1.3500–1.3530 after pushing to a two-week high near 1.3530. The market is clearly respecting the 1.3530–1.3570 band as a hard cap – that zone already rejected price in early January and now acts as the key decision point. Above spot, a clean daily close through 1.3570 opens room toward 1.3700–1.3800, where heavier supply and profit-taking would be expected. On the downside, first support is clustered around 1.3450, then 1.3350, with a deeper structural support line sitting closer to 1.3250. As long as GBP/USD holds above the mid-1.33s, the pair trades like a bullish trend in consolidation, not a top in distribution.

UK Growth Pulse: PMIs Put the UK Back in Expansion

The latest UK survey data justify a stronger GBP. Manufacturing PMI rose to 51.6 in January from 50.6, a 17-month high, while services PMI jumped to 54.3 from 51.4, beating expectations of 51.7 and pushing the composite output index to a 21-month high. That is not marginal noise; it is synchronised strength across both manufacturing and services. Companies report better demand from domestic and export markets and the highest business optimism since before the Autumn 2024 budget. At the same time, employment continues to decline, which means firms are squeezing more output from leaner headcount – supportive for short-term margins and a clear signal that the economy is not in recession mode.

Inflation Pressures and the BoE’s Limited Cut Room

Inside those PMIs, the price details matter for GBP/USD. Output prices are rising at the fastest pace since August 2025, with firms explicitly pointing to high staffing costs as a major driver. That keeps services inflation sticky and makes it difficult for the Bank of England to lean into an aggressive rate-cut path. Markets have adjusted accordingly: where traders previously flirted with multiple cuts, current pricing has collapsed to roughly one BoE cut in 2026. With inflation still sitting above target and demand indicators firming, the BoE is trapped in a “higher for longer” stance. That leaves UK real rates relatively attractive versus the US once you factor in the Fed’s expected easing, and this differential is one of the main engines pushing GBP/USD up into the 1.35–1.36 zone rather than back toward 1.30.

Household Demand: Retail Sales Confirm Underlying Support for GBP

Hard data back the survey strength. December UK retail sales increased 0.4% month-on-month after a 0.1% fall in November, beating market expectations of flat growth. Against a backdrop of elevated living costs and previous mortgage-rate stress, that positive print is a clear statement: the UK consumer is not collapsing. Combining 0.4% retail growth with PMIs at 51.6 and 54.3 shifts the narrative from “stagnant UK” toward “modest expansion with inflation risk”. That macro mix – growth stabilising, demand resilient, and price pressures re-emerging – is exactly what removes room for deep BoE cuts and underpins a stronger GBP/USD profile above 1.34.

Politics as a Valuation Brake on GBP/USD

The pound is not trading like an unrestrained high-beta currency because politics still caps enthusiasm. Local elections and leadership noise – including potential moves by high-profile regional figures into Westminster – are already flagged by institutions as possible volatility triggers. Investors who remember past episodes of UK political instability understand how fast gilts and GBP/USD can reprice even when the macro data look solid. That risk premium sits inside the 1.3530–1.3570 ceiling: fundamentals argue for a breakout, but political uncertainty stops large money from chasing aggressively above 1.36 without confirmation. If local elections or leadership speculation turn messy, any spike above 1.37 can reverse sharply, even with the BoE still leaning hawkish relative to peers.

Dollar Leg: Fed Path, Trade Tension and Eroding Premium

On the USD side of GBP/USD, the issue is no longer just data; it is institutional credibility and policy noise. Fed funds futures currently imply about a 71% probability that the Federal Reserve keeps rates unchanged through April and around a 60% chance that the first cut lands in June, translating into roughly two Fed cuts for 2026. The US labour market remains resilient, and inflation is still above the 2% target, which would normally support the dollar. Instead, repeated tariff threats against Europe, the “TACO” trade narrative and broader trade-war rhetoric have started to chip away at the dollar’s policy premium. When reserve managers see serious debate about the USD’s long-term role at the same time as the Fed edges toward easing, the currency loses some of its safe-haven aura. That erosion feeds directly into GBP/USD gains whenever UK data surprise on the upside.

Cross-Asset Tape: Risk Appetite Tilts Against the Dollar

The wider market tape confirms that investors are willing to rotate out of USD into risk and select high-carry currencies. Gold is holding just below the $5,000 mark after a parabolic move, with layered support every $200 lower down to around $4,000. Silver has doubled in roughly nine weeks and traded above $100 per ounce, showing intense demand for hard-asset hedges. The S&P 500 defended the 6,800 region and is testing resistance in the 6,927–6,983 band near record territory, signalling that equity investors are still comfortable running risk. USD/MXN has broken below 17.50 and is pointing toward 17.00 as carry trades stay in favour. Within G10 FX, the British pound is now grouped with the Australian dollar as one of the stronger performers against the dollar. All these cross-asset signals tell the same story: the default bias is to sell USD on rallies unless the Fed or macro data deliver a clear shock. That bias naturally channels capital into GBP/USD as long as the UK data keep printing like they are now.

GBP/USD Technical Map: Key Levels, Traps and Air Pockets

From a pure price-action lens, GBP/USD is compressing under a visible lid. Spot around 1.3500–1.3530 is flirting with the 1.3530–1.3570 resistance band that rejected buyers in early January. That zone aligns with previous swing highs and a known stop cluster, turning it into a liquidity pocket. A decisive daily close above 1.3570 that holds on a retest would be a clear signal that supply has been absorbed, unlocking the 1.3700–1.3800 region as the next target band. On the downside, buyers are no longer waiting for deep pullbacks: demand starts to show around 1.3450, then strengthens near 1.3350. A more strategic line for medium-term bulls sits around 1.3250; a sustained daily close below that region would signal that political risk, a hawkish Fed shift, or an external shock has broken the bullish structure and forced re-pricing lower, with 1.3100–1.3150 the next area to watch. As long as price stays above the mid-1.33s, dips look more like entries than trend reversals.

Trading Stance on GBP/USD: Direction, Targets and Risk Line

Stacking everything together – January manufacturing PMI at 51.6, services at 54.3, a composite at a 21-month high, December retail sales up 0.4%, output prices rising at the fastest pace since August 2025, market pricing only one BoE cut versus roughly two Fed cuts, Fed funds implying the first US cut around June, gold parked near $5,000, silver above $100, the S&P 500 holding 6,800 and pushing toward 6,983, and USD/MXN trading below 17.50 – the weight of evidence favours the pound rather than the dollar. The clean view is bullish: GBP/USD is a Buy, not a Sell, with better risk-reward on controlled pullbacks into the 1.3420–1.3480 band than on chasing breakouts after they happen. The primary upside objective is a sustained move through 1.3570 and an extension into 1.3700–1.3800 if that ceiling finally gives way. A sensible risk line for that stance sits just below 1.3300; a daily close under that area would downgrade the pair from Buy to Hold/Neutral, signalling that politics or the Fed has reclaimed the narrative. Above 1.3400, with the current BoE–Fed cut gap and resilient UK data, the higher-probability trade remains staying long GBP/USD rather than fighting the move from the short side.

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