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The British pound is set for further gains against the dollar, but near-term consolidation is increasingly likely.
The pound to dollar exchange rate (GBP/USD) surged to a new four-month peak on Monday at 1.3663, the highest level since September 17.
The gains build on the previous week’s 1.95% advance, the biggest single weekly gain since May of last year. These statistics alone point to where momentum is: to the upside.
We’re above all the key moving averages and the chart indicators we prefer to follow are unanimous in advocating for further gains. However, there’s just one warning signal in the form of an overheated daily RSI.
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The Relative Strength Index touches 70 following Monday’s renewed advance, which means it has now reached an ‘overbought’ level. The RSI is used to gauge the speed and magnitude of recent price moves, with readings above 70 traditionally signalling overbought conditions.
It suggests bullish momentum has been powerful and persistent, but also that the rally may be vulnerable to a pause, consolidation, or short-term pullback as buying pressure becomes crowded.
The last time the RSI reached 70 was on December 23, when GBP/USD rose to 1.3524. The pair promptly pulled back and consolidated.
Our Week Ahead Forecast therefore looks for a pullback to 1.36 before the pair resumes higher.
Driving GBP/USD’s gains are a combination of last week’s stronger than expected UK data (the UK PMIs for January were unexpectedly strong, as were the December retail sales numbers).
However, it’s dollar weakness that’s really firing the engine, and we’re seeing a host of currencies notch multi-week and even multi-year records against the Greenback this Monday.
“Heightened US policy uncertainty under the Trump administration relating to foreign policy, trade policy and interference with Fed’s independence has contributed to a weaker US dollar over the past year,” says Lee Hardman, Senior FX Analyst at MUFG Bank Ltd. “The loss of confidence in US policymaking is likely to remain a headwind for the US dollar as we have seen at the start of this year.”
GBP/USD Year-Ahead Consensus Forecast Targets
Median, highest and lowest forecast targets for 2026 from over 30 investment banks.
Compiled by Pound Sterling Live for Horizon Currency.
The dollar’s ongoing weakness is closely linked to the belief that the Federal Reserve will lower rates on a number of occasions this year.
With this in mind the highlight for the coming week is the U.S. Federal Reserve’s January policy meeting, the results of which are to be announced Wednesday.
“The January FOMC meeting is likely to be uneventful,” says David Mericle, an economist at Goldman Sachs. “Chair Powell is likely to emphasise that the FOMC has just delivered three cuts that should help to stabilise the labour market and is well positioned for now while it assesses their impact.”
Such a wait-and-see message could do enough to disappoint a market hoping for signs of further rate cuts, which could help the dollar rebound and the GBP/USD pare its overbought rally.
