GBP/USD Outlook
GBP/USD has strengthened to reach approximately 1.3685 in Tuesday’s early European session. The Pound’s rise against the US Dollar is supported by stronger-than-expected UK Retail Sales and PMI data.
A current overbought RSI indicates potential for a pause in momentum, with key support at 1.3480. Concerns regarding the Federal Reserve’s independence and a possible US government shutdown are perceived as weighing on the US Dollar.
The Fed is likely to maintain interest rates at their policy meeting, having already implemented three consecutive cuts at the end of 2025. Any hawkish comments from Fed officials might provide some support to the US Dollar.
Technically, GBP/USD remains above the 100-day EMA at 1.3385, maintaining a bullish outlook with RSI at 72. The pair faces immediate resistance at the upper Bollinger Band at 1.3656, with initial support at the 20-day middle band at 1.3480.
The Pound Sterling is the world’s oldest currency, pivotal for foreign exchange as it holds 12% of global transactions. Its value is influenced by BoE’s monetary policy decisions and economic data releases like GDP and PMI indicators. A positive trade balance enhances the currency’s strength.
Market Dynamics
We recall seeing the pound strengthen towards 1.37 late last year, driven by strong UK economic reports. This strength was built on the idea that the Bank of England would have to delay any planned interest rate cuts. At the time, an overbought RSI indicator suggested the rally might not last.
That optimism has since faded as the economic picture has become less clear. We have now seen that UK inflation for December 2025 came in at 3.1%, which, while lower than its peak, is still stubbornly above the BoE’s 2% target. Furthermore, the first estimate for Q4 2025 GDP showed growth of only 0.1%, indicating the economy is stagnating under high rates.
On the other side of the pair, concerns about the US from late 2025 have eased for now. The Federal Reserve did hold interest rates steady earlier this month, but their commentary was more firm than many anticipated. The latest Non-Farm Payrolls report added a robust 215,000 jobs, showing the US economy still has considerable momentum.
The overbought signal we saw when the pair was above 1.3650 proved to be a significant warning. With the pair now trading closer to 1.3420, we believe selling rallies is the more prudent approach. Using any strength toward the old support level of 1.3480 to buy puts or sell call spreads could be an effective strategy over the next few weeks.
Volatility is also a key factor for our positioning. Implied volatility for GBP/USD has fallen from its highs in December, with 1-month volatility now sitting near 7.2%, compared to historical averages closer to 9% during periods of uncertainty. This makes buying options relatively cheaper, offering a defined-risk way to position for a potential breakdown below the 1.3385 support level mentioned previously.
