GBP/USD fell below the 1.3550 mark as the US Dollar rebounded despite weak US PMIs. The pair pulled back after reaching nearly four-month highs, with the Pound retreating from a high of 1.3567. At the time of writing, GBP/USD was down 0.15% to 1.3519. This comes as US data showed a dip in economic activity, with the December Services PMI dropping to 52.5 from November’s 52.9 and the Composite PMI decreasing to 52.7.
US Federal Reserve officials had mixed opinions, affecting rate expectations. Richmond Fed President Thomas Barkin suggested future rate decisions need careful consideration due to employment and inflation concerns. Meanwhile, Fed Governor Stephen Miran indicated possible rate cuts by 2026. Despite these signals, the US Dollar Index rose by 0.25% to 98.61. UK’s S&P Global Services PMI increased slightly to 51.4 in December, but rising input prices could impact Bank of England’s decisions.
Technical Outlook
The technical outlook suggests a potential retreat for GBP/USD unless it remains above the 1.3500 mark, with key supports around 1.3385. The currency showed varying strength against other major currencies, gaining against the Swiss Franc but dipping against the Euro and US Dollar. The coming week is light for UK economic data, but important US data and Fed speeches are anticipated.
The recent pullback in GBP/USD below 1.3550 is a key signal for us, despite the pair touching a four-month high. The market appears more focused on the US dollar’s broad recovery than on the UK’s stronger-than-expected Services PMI. This dynamic suggests that underlying dollar strength may be the more dominant theme in the short term.
We are seeing a disconnect where the dollar is strengthening even as Fed officials like Miran talk openly about 100 basis points of cuts this year. This is likely because the memory of the strong December 2025 Non-Farm Payrolls report, which added 210,000 jobs, is overriding softer PMI readings. Markets are showing they will believe hard jobs data over survey data for now.
Key Trigger Levels
On the UK side, the rising input prices noted in the latest PMI report are a serious concern that we have been watching. This aligns with last month’s data showing core CPI remained stubbornly above 3.5%, complicating any plans for the Bank of England to begin easing policy. This stagflationary pressure could be what is capping the pound’s potential upside.
Given this uncertainty, we should watch the 1.3500 level closely as a potential trigger for further downside. Implied volatility in GBP/USD options has already climbed from 7.5% to 8.2% in the past week, suggesting traders are pricing in bigger moves. Purchasing put options with a strike price below 1.3500 could be a prudent way to hedge against a break toward the 200-day moving average near 1.3385.
Looking ahead, this week’s US jobs data, including the ADP and JOLTS reports, will be critical. Any signs of continued labor market strength could validate the dollar’s current rebound and add pressure to the GBP/USD pair. We should be prepared for heightened volatility around those releases.
