Sterling Outlook: Market Drivers and Risk Catalysts

Written by Sandra Leggero

Sandra Leggero has a background in financial markets, having spent more than 9 years in commodities trading for several European and Asian companies. She holds a degree in Economics from the University of Pavia and specializes in emerging markets.

, | Updated: January 5, 2026

Key Moments

GBP/USD falls about 0.2% toward 1.3420 as risk sentiment weakens after a U.S. strike on Venezuela and the capture of President Nicolas Maduro.
The U.S. Dollar Index revisits a three-week high at 98.80, reflecting stronger demand for safe-haven currencies.
GBP/USD trades near 1.3427, just above its 20-day EMA at 1.3422. The 61.8% Fibonacci retracement at 1.3491 acts as key resistance.

Geopolitical Tensions Drive Flight to Safety

The Pound Sterling (GBP) starts the week under pressure against safe-haven currencies. However, it still outperforms some higher-risk currencies. GBP fell 0.2% to 1.3420 versus the US Dollar (USD). Traders moved toward risk-off positions after the U.S. strike on Venezuela and the capture of President Nicolas Maduro on drug-trafficking charges.

Meanwhile, the US Dollar Index (DXY), which tracks the Greenback against six major peers, reached 98.80. This marks an over three-week high, highlighting renewed demand for the dollar.

Over the weekend, the United States conducted a raid in Venezuela and announced plans to bring American oil firms into the country’s oil industry. Additionally, U.S. President Donald Trump issued warnings of potential actions in Colombia and Iran.

Regarding Colombia, Trump said, “Colombia’s very sick, run by a sick man who likes making cocaine and selling it to the United States,” according to Reuters. On Iran, he added the country would “get hit very hard” if Tehran started killing protestors.

BoE Policy Outlook Supports GBP Against Riskier Currencies

Despite weakness versus the USD, the Pound trades stronger against more volatile currencies. This reflects expectations that the Bank of England (BoE) will pursue a gradual monetary easing cycle in 2026. In its final policy decision of 2025, the BoE cut rates by 25 basis points to 3.75% in a 5-4 vote, signaling a “gradual downward path.”

Analysts say the moderate pace reflects inflation in the UK, which remains above the 2% target. The Consumer Price Index (CPI) slowed to 3.2% in November, down from 3.8% in September.

U.S. Data Calendar Poised to Stir GBP/USD Volatility

Investors expect volatility in GBP/USD this week. Key U.S. economic releases, especially December Nonfarm Payrolls (NFP) due Friday, will be closely watched. Traders will use the labor data to gauge the health of the U.S. jobs market.

In 2025, the Federal Reserve (Fed) implemented three interest rate cuts, lowering the target range to 3.50%-3.75% to support softening labor conditions. The upcoming U.S. data could indicate whether this policy stance remains appropriate.

On Monday, attention turns to the ISM Manufacturing Purchasing Managers’ Index (PMI) for December, releasing at 15:00 GMT. The consensus expects a slight rise to 48.3 from 48.2 in November, suggesting continued contraction in manufacturing but at a slower pace.

GBP/USD Technical Picture: Price Holds Above Short-Term Support

On the daily chart, GBP/USD trades at 1.3427, just above a rising 20-day Exponential Moving Average (EMA) at 1.3422. This upward-sloping EMA cushions minor pullbacks and supports a constructive short-term bias.

The Relative Strength Index (RSI) stands at 54, in neutral territory. It has retreated from higher levels, indicating easing bullish momentum without signaling a trend reversal.

Technical Level	Price	Comment
Spot price (time of writing)	1.3427	Trading just above 20-day EMA
20-day EMA	1.3422	Short-term dynamic support
50% Fibonacci retracement	1.3399	Immediate support
61.8% Fibonacci retracement	1.3491	Next resistance

The Fibonacci retracements from the 1.3791 high in July to the 1.3008 low in November provide clear technical markers. The 61.8% retracement at 1.3491 is the next upside hurdle. The 50% retracement at 1.3399 now serves as nearby support. A daily close above 1.3491 would suggest more upside, while a break below 1.3399 could trigger a deeper corrective move.

(The technical analysis of this story was written with the help of an AI tool.)

Pound Sterling: Structure, Drivers, and Key Economic Influences

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world, dating back to 886 AD. It is the official currency of the United Kingdom and the fourth most traded FX unit globally, accounting for 12% of all transactions, averaging $630 billion per day in 2022.

Key trading pairs include GBP/USD, known as ‘Cable’ (11% of FX), GBP/JPY, or the ‘Dragon’ (3%), and EUR/GBP (2%). The Pound is issued by the Bank of England (BoE).

How Bank of England Decisions Impact GBP

Monetary policy by the BoE is the main factor influencing GBP. The BoE aims for “price stability,” targeting roughly 2% inflation. Its main tool is adjusting interest rates.

High inflation prompts the BoE to raise rates. This makes credit more expensive but strengthens GBP as the UK becomes more attractive for investors.

Low inflation signals slower growth. The BoE may lower rates to encourage borrowing and stimulate economic activity.

How Economic Data Influences GBP

Data releases gauge economic health and affect GBP. Indicators include GDP, Manufacturing and Services PMIs, and employment.

A strong economy attracts investment and may push the BoE to raise rates, strengthening GBP. Weak data, conversely, tends to weaken the currency.

Economic releases from Germany, France, Italy, and Spain, though outside the UK, can indirectly influence GBP via trade and market sentiment.

Impact of Trade Balance on GBP

The Trade Balance measures the difference between exports and imports over a period. Strong exports create demand for GBP from foreign buyers, boosting its value. Conversely, a negative balance can weaken GBP.