The GBP/USD currency pair has seen a positive trend, with buyers attracted for the second consecutive day due to a weaker US Dollar. The pair progressed towards the 1.3500 mark, the highest point since early October, backed by a favourable technical outlook. This upward move is further supported by a break through the 100-day Simple Moving Average and strength beyond the 61.8% Fibonacci retracement level.
The Moving Average Convergence Divergence hints at moderated momentum, and a consistent move above the 1.3500 mark could drive the pair towards the 1.3600 region. The 100-day SMA offers initial support, and the Relative Strength Index at 68 suggests limited gains without new catalysts. A move above the 61.8% retracement keeps buyers in control.
The Pound Sterling As A Global Force
The Pound Sterling, the UK’s currency, accounts for 12% of foreign exchange transactions globally, averaging $630 billion daily. Its value is mainly influenced by the Bank of England’s monetary policy, focusing on a 2% inflation target. Economic data like GDP, services PMIs, and trade balance impact its strength, with a strong economy boosting Sterling through potential interest rate increases.
We are seeing strong upward momentum in GBP/USD, which is building on its recent gains to test the critical 1.3500 level. This strength is primarily fueled by a weakening US Dollar, especially after we saw the latest Core PCE inflation data for November come in slightly below forecasts at 2.8%. This data reinforces the market’s expectation that the Federal Reserve will maintain a dovish stance heading into 2026.
On the other side of the pair, the Bank of England’s hawkish policy provides a solid foundation for the Pound. We just saw UK retail sales figures for November show a surprise jump of 1.2% month-over-month, indicating that consumer demand remained resilient through the holiday shopping season. This robust domestic activity gives the BoE little reason to pivot away from its commitment to controlling inflation.
For derivative traders, this divergence suggests considering bullish strategies in the coming weeks. Buying call options with strike prices at or above 1.3500 could capture a potential breakout, while selling out-of-the-money put options could take advantage of the firm support around the 1.3370 mark. This approach aligns with the technical picture of buying on any corrective dips.
Year End Trading Considerations
We must consider that trading volumes will be thin as we approach the end of the year. This low liquidity can amplify price movements, meaning a break above 1.3500 could be sharp and fast. While the Relative Strength Index is nearing overbought levels at 68, the underlying fundamental story appears strong enough to sustain the rally.
This setup is reminiscent of the market conditions we observed in late 2023, when a similar policy divergence between the Fed and BoE drove a multi-week rally in the pair. Back then, the breakthrough of key technical levels also preceded a sustained move higher into the new year. History suggests that such fundamental drivers can create trends that persist through the first quarter.
