GBP/USD recovered from a one-week low after opening with a bearish gap on Monday, and moved back above 1.3500 in early European trading. It filled the weekly gap as the US Dollar weakened.
US-Iran tensions over the Strait of Hormuz supported early safe-haven demand, but the Dollar failed to hold gains. The move came as markets trimmed expectations of a US Federal Reserve rate rise, while the Bank of England outlook remained comparatively firmer.
On the 4-hour chart, the pair had previously broken above the 200-period simple moving average (SMA), but the rise stalled near the 61.8% Fibonacci retracement around 1.3600. Momentum signals were mixed, with the RSI near 48 and the MACD slightly negative.
Potential resistance sits at 1.3600, then the 78.6% Fibonacci level at 1.3716, and the cycle high area near 1.3868. Support levels are the 50% retracement at 1.3512, the 38.2% level at 1.3428, the 200-period SMA at 1.3364, then 1.3324 and 1.3156.
We are seeing GBP/USD hover near 1.2550 as the market weighs different paths for the Bank of England and the Federal Reserve. With UK inflation holding at a stubborn 2.9% last month and US inflation at 3.1%, the debate over which central bank will cut interest rates first is creating significant volatility. This divergence in policy expectations is the main driver for the pair right now.
We remember a similar setup in 2025 when the pair saw a bearish gap down before dip-buyers emerged and pushed the price back above a key psychological level. At that time, fading expectations of a Fed rate hike were the primary catalyst that undermined the dollar, even against a backdrop of geopolitical tension. This historical pattern highlights how sensitive the currency pair is to shifting central bank narratives.
Looking back at the 2025 price action, we saw the subsequent rally stall near the 61.8% Fibonacci retracement level, which acted as major resistance. This serves as a critical reminder that even with a positive fundamental story, key technical barriers can halt upward momentum and trigger a reversal. The mixed momentum signals we saw then also correctly advised caution before assuming a new uptrend was firmly in place.
For the coming weeks, this suggests that while the fundamental case for a stronger pound exists, derivative traders should be wary of major resistance levels. Buying call options with strikes just above the current range could offer a way to participate in a potential breakout while defining risk. A decisive break below the 200-day moving average, currently near 1.2480, would be a strong signal that dollar strength is taking over.
On the downside, key Fibonacci retracement levels from the most recent rally will provide support, just as they did in 2025. We will be closely watching upcoming employment and retail sales data from both the UK and US. Any surprises in these figures will likely dictate the pair’s direction and could offer opportunities for nimble traders.
