The GBP/USD pair experienced a rebound, trading around 1.3560 during the Asian session on Friday, following two days of gains. Technical analysis suggests a potential bearish reversal as the pair is near the lower boundary of an ascending channel pattern. The 14-day Relative Strength Index (RSI) stands neutral at 50, indicating momentum that could support an upward move upon exceeding 50.
Market Indicators
The pair maintains above the 50-day Exponential Moving Average (EMA) of 1.3496, with the nine-day EMA at 1.3626 acting as a cap. While the broader tone remains supported, short-term traction is fading, favouring consolidation before resuming direction. Recent transactions have taken the pair to a two-week low of around 1.3500 due to sustained US Dollar buying and dovish Bank of England signals.
US Dollar strength is bolstered by the potential nomination of Kevin Warsh as the next Federal Reserve chair and rising market volatility, causing the USD Index (DXY) to reach a fresh high since January 23. The Bank of England’s recent decision to hold rates with a dovish stance, despite a 5-4 voting split for rate pauses, saw the GBP/USD pair drop by 0.90%, trading at 1.3529.
We remember the market sentiment in 2025 when the pound was struggling to hold above the 1.3500 level against the dollar. The Bank of England had just adopted a dovish tone, signaling rate cuts were on the table, which put significant pressure on the currency. That period of indecision, with the RSI hovering around 50, now looks like a distant peak.
Looking at today’s data, the Bank of England’s forecast for a sharp inflation drop in 2025 did materialize, with the latest ONS figures showing UK CPI has fallen to 2.4%. However, the economy has slowed, and recent retail sales figures for January 2026 showed a contraction of 0.5%, raising concerns about a recession. This has put the Bank of England in a difficult position, holding rates steady for now but leaving the door open for cuts later this year.
Central Bank Policies
In contrast, the US economy appears more resilient, with the latest Non-Farm Payroll report showing a robust 225,000 jobs were added last month, beating expectations. US inflation remains stickier at 2.9%, making the Federal Reserve far more hesitant to signal any new rate cuts. This growing divergence in central bank policy continues to favor the US dollar.
For derivative traders, this setup suggests positioning for further sterling weakness, as the path of least resistance for GBP/USD appears to be downwards. Implied volatility has been climbing, indicating the market is pricing in larger price swings in the weeks ahead. This makes option strategies more attractive than simply shorting the spot market.
We see value in buying out-of-the-money put options with strike prices around 1.2600, which offers a cost-effective way to profit from a potential slide below current support levels. Alternatively, a bear put spread could be used to finance the position and reduce the upfront premium cost. This strategy would benefit from a steady grind lower in the pound over the next several weeks.
Technically, the pair is now trading well below its 50-day and 200-day moving averages, confirming the bearish trend we have seen develop since late 2025. Any rallies back towards the 1.2850 area should be seen as opportunities to initiate new short positions. The key support levels we are watching are the psychological 1.2700 mark and then the lows from last quarter.
