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Pound sterling is on the offensive against the euro.

The pound to euro exchange rate (GBP/EUR) has broken above a key resistance level to register its highest level since October at 1.1490.

The new two-month peak follows the Christmas period of consolidation that saw GBP/EUR struggle to advance above the 100-day exponential moving average (EMA), presently located at 1.1470.

The 100-day EMA held the pound’s year-end advance, and we said last week that a break through this resistance barrier would open the door to 1.1520, which is the next major technical zone of interest.

That breakout now looks to be in train. The technical setup is constructive with the pair comfortably cocooned in a short-term uptrend, helped by constructive global market conditions.

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Year-end was characterised by rising stock markets, with the UK’s FTSE 100 hitting a new record above 10K last Friday. With no domestic data to bother pound sterling, GBP/EUR drifted higher in tandem with the upbeat mood music.

Should this continue to play out in the coming days, then GBP/EUR can achieve 1.1520 and perhaps go even higher.

It’s a quiet week data-wise in the UK, but the Eurozone will offer up some CPI inflation numbers.

Here, any strength would reinforce the notion that the European Central Bank (ECB) won’t cut interest rates any further while raising the odds that the next move will be a rate hike.

This should bolster short-term Eurozone bond yields, which are heavily influenced by the ECB’s base rate. Firm Eurozone bond yields, in turn, offer support to euro exchange rates.

The Eurozone CPI inflation release comes on Wednesday, and the consensus expects 2.4% y/y, confirming inflation is anchored above the ECB’s 2.0% target.

However, we would expect some market reaction to German CPI inflation, due on Tuesday, as the German data often gives a strong clue as to where the Eurozone’s figures will land the following day.

With ECB policy expectations deeply entrenched, we doubt the market reaction to the inflation data will be long-lived, meaning any GBP/EUR setbacks would be temporary.

Our bet is that global sentiment will stay in charge, and further gains in world stock markets will assist GBP/EUR higher.

– Written by


David Woodsmith

STORY LINK Pound Sterling to Dollar Forecast: GBP/USD “Neutral” as Markets Turn Cautious

The Pound to US Dollar exchange rate (GBP/USD) eased back from recent highs on Monday as rising geopolitical tensions encouraged investors to favour traditional safe-haven assets.

At the time of writing, GBP/USD was trading near $1.3461, little changed from the start of the session.

The US Dollar (USD) found modest support at the beginning of the week as investor caution increased following developments in Venezuela over the weekend.

Reports of US military action in Caracas and the detention of Venezuelan President Nicolás Maduro and his wife, Cilia Flores, prompted a shift toward more defensive positioning in early trade.

While the immediate reaction across currency markets was relatively muted, investors remain alert to the risk of further escalation, which could drive volatility if broader geopolitical consequences begin to unfold.

There are also concerns that President Donald Trump’s hardline approach to regime change in Venezuela could set a wider precedent, potentially increasing instability elsewhere and reinforcing demand for safe-haven currencies such as the US Dollar.

That said, gains in USD were capped by ongoing expectations that the Federal Reserve will continue easing monetary policy through 2026.

The Pound (GBP) held its ground on Monday, trading within a narrow range after comments from Prime Minister Keir Starmer hinted at a more conciliatory approach toward post-Brexit relations with the European Union.

In an interview with the BBC, Starmer suggested that closer alignment with the EU single market could be pursued where it benefits the UK, while stopping short of endorsing a full customs union.

Markets interpreted the remarks as signalling a more pragmatic trade strategy in the year ahead, with improved EU relations seen by many investors as a potential positive for UK growth and investment prospects.

GBP/USD Outlook: Geopolitical Risks to Keep Markets on Edge?

Looking ahead, movement in the Pound to US Dollar exchange rate is likely to remain uneven as investors continue to monitor developments in Latin America and assess the risk of further US intervention.

Speculation around possible escalation involving Venezuela — or indications of action in neighbouring countries — could sustain demand for the US Dollar via heightened risk aversion.

In the UK, attention will also turn to the final services PMI for December, due on Tuesday. A downward revision could weigh on Sterling, particularly if it mirrors last month’s disappointing manufacturing data and reinforces concerns over the UK’s growth outlook.

According to FX analysts at Scotiabank, “The pound is up a fractional 0.1% vs. the USD and outperforming all of the G10 currencies with the exception of JPY.

“Domestic releases have been limited to second-tier credit/lending data, suggesting that the pound’s resilience is likely being driven by flows related to geopolitics and reflects the market’s assessment of the strength of the US/UK relationship.

“Risk reversals are little changed, offering little in terms of sentiment-driven movement.

“We are neutral awaiting a break of the two week range roughly bound between 1.34 and the mid1.35s.”

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TAGS: Pound Dollar Forecasts

Created on January 06, 2026

Summary

• The US dollar pulled back on Monday as we continue to see a bit of consolidation.

US Dollar vs Japanese Yen

The US dollar did initially rally against the Japanese yen during trading on Monday, but has since fallen in what has been a little bit of lackluster performance by the dollar, more than anything else.

When you look at the technical analysis, this is a market that has been consolidating after a big move to the upside, and the recent pullback of the last couple of weeks makes sense because, at this juncture, it appears to me very obvious that the 158 level is an area that you are going to have to watch closely.

If we can break above 158, then there is a world where we start to see a lot of upward activity. At that juncture, I’m looking at a move to the 160 yen level pretty quickly. That being said, we did pull back during the trading session on Monday, and I think this just reiterates the idea of consolidation between the 158 level on the top and the 154.50 yen level on the bottom.

Interest Rate Differential and Carry Trade Dynamics

The fundamentals for this pair are driven by the carry trade, the interest rate differential, as per usual, as the Federal Reserve currently has a policy between 3.5% and 3.75% after a rate cut in December. Markets expect maybe one more cut in the first quarter, but the rate remains relatively high in comparison to Japan, which only has a 0.75% rate after a hike.

This is a 30-year high. Even with the BOJ hiking and the Federal Reserve cutting, the gap is still roughly 3%. So, investors will more likely than not continue to sell the yen to buy the dollar and pick up the differential. That being said, the US dollar has struggled a bit, so this may not be the first place traders are looking to short the yen by another currency.

That being said, the Bank of Japan is still suggesting that it will raise rates if inflation targets are met. We’ll have to see. The slow and gradual rate hike situation in Tokyo is disappointing for those who are hoping for the yen to recover. The Federal Reserve is easing, but the US economy remains extraordinarily resilient, possibly even boosted by new fiscal spending and government bills mentioned in recent forecasts, preventing a dollar sell-off en masse.

We are getting pretty close to the 160 yen level, relatively speaking. In that scenario, the Japanese have, of course, defended. Geopolitics could drive money back into the yen as well. But all things being equal, I look at this as a bullish but cautious situation. The primary trend is up, fueled by the interest rate differential, but you also probably have somewhat limited upside at 160 yen.

The Bank of Japan has a meeting January 23. Any surprise hike could break this trend, but we’ll just have to see where this is. I remain more buy-on-the-dip here in a short-term back-and-forth type of environment.

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Created on January 06, 2026

The euro went back and forth on Monday, as traders continued to digest the news over the weekend out of Caracas. Risk sentiment is likely to be in flux at best.

EUR/USD

The euro was back and forth during the trading session on Monday as we initially tested the 50-day EMA. I think at this point in time, it is obvious that the buyers are still willing to stick with the euro despite the fact that it has not been able to break above a significant resistance barrier. That resistance barrier is the 1.18 level, which could extend all the way to the 1.19 level. I think it is going to take pretty hefty bullish pressure to finally break above there.

Policy Divergence and Growth Outlook

But there is a little bit of policy divergence here between these two central banks as the Federal Reserve is expected to cut rates further into 2026, and as a result, it is likely that the US dollar will face some pressure there. That being said, the ECB is expected to be less aggressive with its cuts, although cutting is still possible. At this point, the European growth is projected to be modest, somewhere right around 1.2%, but steady and supported by fiscal stimulus in Germany. The United States growth outlook is expected to slow in the beginning part of 2026 but then take off.

All things being equal, I think this is also a market that is trying to determine whether or not inflation is going to be sticky in America. If it is, that is dollar positive. Ultimately, I think this is a situation where traders look at this through the eyes of a consolidation range with more of a buy on the dip mentality. Breaking below the 1.14 level smashes this narrative to pieces, but right now, this has held steady for several months.

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Christopher Lewis has been trading Forex and has over 20 years experience in financial markets. Chris has been a regular contributor to Daily Forex since the early days of the site. He writes about Forex for several online publications, including FX Empire, Investing.com, and his own site, aptly named The Trader Guy. Chris favours technical analysis methods to identify his trades and likes to trade equity indices and commodities as well as Forex. He favours a longer-term trading style, and his trades often last for days or weeks.