GBP/USD exhibits strong intraday bullish momentum, aligning with its dominant D1 uptrend, as it attempts to reverse a recent H4 correction. This upward trajectory is fundamentally reinforced by expectations of a significant monetary policy divergence between the Bank of England (BoE) and the Federal Reserve (Fed) in 2026. While the BoE is anticipated to pursue a more gradual easing path, the Fed's dovish stance and high probability of further rate cuts in the coming year provide a robust tailwind for Sterling against the US Dollar. The pair approaches critical H4 resistance levels, with market participants navigating thin year-end liquidity and positioning for the new year, where the BoE's less aggressive rate-cut expectations compared to the Fed are a key driver.
Technical Analysis
Multi-Timeframe Market Structure
The dominant trend on the D1 timeframe for GBP/USD remains strongly bullish, with price trading well above its 20, 50, and 200-period Exponential Moving Averages, all in a clear bullish alignment. MACD is positive and ADX, at 35.82, confirms robust trend strength. This sustained daily uptrend fundamentally aligns with the market's expectation that the Bank of England will be less aggressive in its rate-cutting cycle compared to the Federal Reserve, providing long-term structural support for the Pound.On the H4 timeframe, the pair recently experienced a pullback within this broader D1 uptrend. Price closed below the EMA20 but successfully held above the EMA50 and EMA200, indicating that the underlying bullish structure remains intact despite short-term profit-taking or consolidation. MACD is slightly negative, and RSI is neutral around 51.66, reflecting this temporary loss of upward momentum. The H4 SAR at 1.35060 acts as immediate overhead resistance, defining the upper boundary of this correction.
The short-term intraday perspective (H1/M30) reveals a strong bullish resurgence. On the H1 chart, price has rallied significantly, closing above its EMA20, with MACD trending upwards and RSI at 58.71. The M30 timeframe provides clearer bullish confirmation, with price trading above all key EMAs (20, 50, 200), MACD turning positive, and RSI at 62.74. The M30 ADX is strong at 33.46, indicating robust short-term buying pressure. This intraday strength suggests that traders are positioning for a continuation of the D1 bullish trend, potentially driven by early positioning for the anticipated BoE/Fed policy divergence.
Critical Price Levels & Momentum Assessment
Key technical levels are crucial for navigating current price action. Immediate overhead resistance is found at 1.35060, represented by the H4 Parabolic SAR, which marks the top of the recent H4 correction. A break above this level is essential for confirming a full trend continuation, likely fueled by strengthening conviction in the BoE's comparatively hawkish stance. Further resistance exists at 1.35300, a significant previous D1 high, which would represent a more substantial bullish commitment.On the downside, a critical intraday support zone is established between 1.34600-1.34620, a confluence of the H1 EMA20 and H4 EMA50. This zone is vital for maintaining the current bullish impulse. Below this, 1.34370, the recent H4 low, serves as a key psychological and technical support from the recent pullback. A breach of this level would signal a deeper correction, potentially if USD demand intensifies due to year-end adjustments, overriding the fundamental divergence narrative.
Momentum quality is assessed as Moderate to Strong. The D1 timeframe maintains a robust bullish stance, and the H1/M30 charts show renewed buying interest following the H4 consolidation. The alignment of MACD and RSI across shorter timeframes in a bullish direction supports continued upward movement. Current volatility, with H1 ATR at 0.002121, is moderate for intraday movements, allowing for actionable trading opportunities. The market is in a transitional phase, with intraday signals indicating a clear bullish bias, poised to overcome the H4 correction and align with the stronger D1 uptrend, a move that fundamental policy divergence supports.
Fundamental Market Drivers
Central Bank Policy & Economic Outlook
The primary fundamental driver for GBP/USD is the anticipated divergence in monetary policy between the Bank of England (BoE) and the Federal Reserve (Fed) in 2026. The British Pound remains upbeat on market expectations that it will continue to outperform in the new year, largely due to hopes of fewer interest rate cuts by the BoE compared to other major central banks. The BoE, having reduced interest rates by 25 basis points (bps) to 3.75% this month, has guided that its monetary policy will remain on a gradual downward path. The bank projects inflation to ease to around 3% in Q1 2026 and closer to 2% in Q2, indicating confidence in achieving its target. This measured approach suggests the BoE is not in a hurry for aggressive easing, which provides fundamental support for Sterling. The UK labor market, however, presents a potential headwind, with the Unemployment Rate climbing to 5.1% in the three months ending October 2025, the highest since March 2021. This weakness in employment conditions remains a key focus for BoE officials.Conversely, the Federal Reserve's stance is notably more dovish. The FOMC minutes from December revealed that officials argued in favor of reducing interest rates further, even after trimming them by 75 basis points in 2025, to support weakening labor market conditions. Most participants noted that "moving toward a more neutral policy stance would help forestall possible job market deterioration." According to the CME FedWatch tool, there is a 76.1% chance that the Fed will cut interest rates by at least 50 basis points in 2026. This significantly more aggressive easing expectation from the Fed, combined with the BoE's gradual approach, creates a strong interest rate differential outlook that favors GBP over USD, reinforcing the technical bullish bias on GBP/USD.
Market Sentiment & Risk Environment
Current market sentiment is characterized by low liquidity due to the year-end holiday period. This environment can amplify price movements on lower volume, increasing the risk of erratic price action or false breakouts. Despite the thin trading, the broader market outlook for 2026 is one of optimism, with expectations for solid economic performance globally. For the US Dollar, the end-of-year position adjustments have led to some fresh demand, causing the US Dollar Index (DXY) to post a fresh weekly high near 98.35. This short-term USD strength presents a counter-current to the underlying dovish Fed expectations. However, the prevailing narrative that the Pound will outperform in 2026 due to the BoE's relatively tighter policy stance provides a strong fundamental backdrop for GBP/USD. The upcoming announcement of Fed Chair Jerome Powell’s successor in January will be a significant catalyst for USD direction, potentially influencing the pair's trajectory.Integrated Trading Execution
Primary Trading Scenario
- Bias: Bullish - The strong D1 uptrend and renewed intraday buying pressure, fundamentally supported by the anticipated BoE/Fed monetary policy divergence, favor bullish continuation.
- Trigger/Entry: A bullish breakout and H1 close above 1.35060 (H4 SAR resistance) confirms the end of the H4 correction. Alternatively, a pullback to the 1.34700-1.34720 (M30 EMA20/50 zone) with bullish M30 candle confirmation offers an entry closer to support, capitalizing on the underlying fundamental strength.
- Stop-Loss: Place below 1.34450, which is below the recent H4 low and provides a 1.25x H1 ATR buffer, protecting against a deeper, fundamentally unfounded correction.
- Profit Targets:
- Target 1: 1.35300 (Previous D1 high), offering a minimum 1:2 R:R, as the pair reclaims key structural resistance.
- Target 2: 1.35500 (Psychological level), representing a potential extension of the bullish move if policy divergence themes attract further capital inflows.
- Session Context: This scenario is best executed during the upcoming London session, where increased liquidity can provide stronger confirmation for the breakout and sustained upward movement, validating the fundamental thesis.
Alternative Market Scenario
- Invalidation: An H1 close below 1.34600 invalidates the primary bullish scenario, indicating a failure to sustain upward momentum above 1.34800.
- Bias: Bearish/Consolidation - A break below key intraday support suggests the H4 correction may deepen or consolidate further, potentially driven by year-end USD demand or thin-liquidity induced volatility.
- Trigger/Entry: A bearish H1 close below 1.34600 signals a breakdown of the immediate support zone.
- Stop-Loss: Above 1.34800, just above previous H1 close and M30 resistance, to manage risk for the counter-trend move.
- Profit Targets:
- Target 1: 1.34370 (Recent H4 low), retesting the base of the prior pullback.
- Target 2: 1.34270 (D1 EMA20), probing the daily trend support.
- Session Context: This scenario gains traction if the current low-liquidity environment leads to a false breakout of the H4 SAR or if fresh selling pressure emerges during the Asian session, potentially fueled by profit-taking or end-of-year position adjustments.
Risk Management & Catalyst Analysis
Trade Risk Assessment
The confluence quality for GBP/USD is medium. While the dominant D1 trend is strongly bullish, and shorter timeframes (H1/M30) show robust bullish momentum, the H4 timeframe indicates a recent correction. This creates a slight divergence between the short-term and medium-term views, requiring careful monitoring. The prevailing low-liquidity environment of the late New York/early Asian session, exacerbated by year-end holidays, poses significant intraday-specific risks. This can lead to erratic price action, wider spreads, and an increased susceptibility to stop-loss hunting or false breakouts. Position sizing should be conservative, utilizing an H1 ATR(14) of 0.002121. A stop-loss of 1.25x ATR provides approximately 26 pips of buffer, which is appropriate for intraday trades focusing on short-term movements. The absence of immediate high-impact economic events within the next 48 hours reduces event-specific risk, allowing technical levels and central bank policy divergence to drive price action.Economic Calendar & Event Impact
The economic calendar for the immediate future is light, particularly regarding high-impact events for the GBP/USD pair.- US Unemployment Claims (Yesterday, 13:30 UTC): Forecast 219K, Previous 214K - This data point from the previous day offers context on the US labor market, which is a key consideration for the Federal Reserve's dovish policy stance. Higher claims reinforce the narrative of a weakening labor market, supporting the Fed's inclination for rate cuts and thus potentially weighing on USD.
