GBP/USD dropped below 1.3550 as the US Dollar gained strength, even with weak US PMI figures. The pair pulled back after reaching highs not seen in four months, with the Pound retreating from a peak of 1.3567. At this moment, GBP/USD is down 0.15% at 1.3519. This change follows US data showing a decline in economic activity, with the December Services PMI falling to 52.5 from November’s 52.9, and the Composite PMI decreasing to 52.7. Opinions among US Federal Reserve officials were mixed, influencing rate expectations. Richmond Fed President Thomas Barkin mentioned that future rate decisions should be made carefully, considering employment and inflation. Meanwhile, Fed Governor Stephen Miran suggested that rate cuts could happen by 2026. Despite these comments, the US Dollar Index increased by 0.25% to 98.61. On the UK side, the S&P Global Services PMI rose slightly to 51.4 in December, but increasing input prices could affect the Bank of England’s decisions.

Technical Outlook

The technical outlook indicates that GBP/USD may face a retreat unless it stays above the 1.3500 level, with key supports around 1.3385. The currency showed varying strength against other major currencies, gaining against the Swiss Franc but falling against the Euro and US Dollar. The upcoming week appears light for UK economic data, but important US data and Fed speeches are expected. The recent drop in GBP/USD below 1.3550 is noteworthy, even after the pair reached a four-month high. The market seems to focus more on the US dollar’s rebound rather than the UK’s better-than-expected Services PMI. This indicates that the US dollar’s strength could be the dominant theme in the short term. There is a disconnect, as the dollar strengthens even when Fed officials like Miran talk about possible rate cuts of 100 basis points this year. This may be due to the strong December 2025 Non-Farm Payrolls report, which added 210,000 jobs, overshadowing softer PMI numbers. For now, markets seem to trust hard job data over survey results.

Key Trigger Levels

On the UK front, rising input prices in the latest PMI report are a significant concern. This reflects last month’s data, which showed core CPI persisting above 3.5%, complicating any plans for the Bank of England to ease policy. This stagflationary pressure might be limiting the Pound’s potential for growth. Given this uncertainty, we should closely monitor the 1.3500 level, as it could trigger further declines. Implied volatility in GBP/USD options has risen from 7.5% to 8.2% in the past week, indicating that traders expect larger moves. Buying put options with a strike price below 1.3500 may be a smart strategy to protect against a drop toward the 200-day moving average around 1.3385. Looking ahead, this week’s US jobs data, including the ADP and JOLTS reports, will be crucial. Any signs of continued strength in the labor market could support the dollar’s current rebound and put pressure on the GBP/USD pair. We should be ready for increased volatility around these reports. Create your live VT Markets account and start trading now.

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