GBP/USD rose by over 0.23% on Friday and traded near 1.3494. The move followed a US Supreme Court ruling that blocked Donald Trump’s tariffs under the IEEPA without US Congress approval, which weighed on the US dollar.
US data showed Q4 2025 GDP slowed from 4.4% to 1.4% year on year, with disruption linked to a 43-day government shutdown. US core PCE inflation rose to 3% year on year in December, above forecasts of 2.9% and the prior 2.8%.
Tariff Ruling Drives Dollar Dip
After the ruling, the US Dollar Index (DXY) fell 0.14% to 97.67. US officials, including Treasury Secretary Scott Bessent, said the administration would seek other legal routes to keep as many duties as possible.
UK Retail Sales rose 4.5% in January versus an estimate of 2.8%, based on ONS data. February S&P flash PMIs expanded in both services and manufacturing, while UK unemployment rose in Q4 2025.
Money markets priced an 80% chance of a Bank of England cut in March, while the first Federal Reserve cut was pushed to June. On charts, GBP/USD traded around 1.3498, with resistance near 1.3530 and the FXS Fed Sentiment Index at 114.93.
The US Supreme Court’s ruling against the tariffs has given GBP/USD a temporary lift, but we see this as a chance to position for a pullback. The US data from last quarter in 2025 showed a stagflationary mix, with slowing growth but stubbornly high inflation. This complicates the Federal Reserve’s path and supports the dollar against currencies with more dovish central banks.
Monetary Policy Divergence Builds
The key factor for us is the stark divergence in monetary policy that is becoming clearer. The Bank of England is facing rising unemployment and is widely expected to cut interest rates in March to support the weak economy. In contrast, the Fed is dealing with core inflation hitting 3%, forcing them to delay any potential cuts until at least June.
This situation reminds us of past periods of policy divergence, like in 2022 when the Fed’s aggressive hiking outpaced the BoE, significantly strengthening the dollar. Recent UK statistics support this view, as GDP for the second half of 2025 grew by a meager 0.1%, highlighting an economy on the brink of recession. This pressure makes a BoE rate cut next month almost a certainty, which should weigh heavily on the pound.
On the US side, the details of the latest inflation report are what matter most. Core services inflation, a metric the Fed watches closely, has remained elevated, running at an annualized pace of over 4% last month. This stickiness gives the Fed a clear reason to remain patient, solidifying the dollar’s yield advantage over sterling in the coming months.
For derivatives traders, this suggests that buying downside protection on GBP/USD is a prudent strategy. One-month risk reversals, which measure the premium for puts over calls, have already turned negative, indicating that the options market is positioning for a decline. We see value in buying GBP/USD puts with an expiration date after the March Bank of England meeting.
The technical picture points to a specific area of interest around the 1.3530 resistance level. We would view any failure to break and hold above this level as an opportunity to initiate bearish positions. The expectation is for the pair to drift lower and test the rising trendline support near 1.3400 as the central bank policy gap becomes the market’s primary focus.
