GBP/USD recovers above 1.3200 as dollar rally loses steam

GBP/USD climbed back above 1.3200 on Friday, recovering from year-to-date lows of 1.3140 as a softer dollar and sliding oil prices offered relief to the beleaguered British pound.

The British pound rose for a second consecutive session, with GBP/USD trading at 1.3205 in European trading after touching its lowest level since November at 1.3140 on Wednesday. The recovery came as the US dollar retreated from its strongest level since May 2025, with the dollar index easing after core PCE inflation data met expectations at 3.4 percent year-on-year, reducing fears of an even more hawkish repricing from the Federal Reserve.

"The dollar's rally was already stretched heading into the PCE print, and in-line inflation gave traders a reason to take profits," said Jane Foley, senior FX strategist at Rabobank. "But the pound's upside remains capped by the UK's political uncertainty and the market's reassessment of Bank of England rate expectations."

Oil prices falling almost 10 percent across the week have been a key driver of the shifting macro backdrop. Crude's decline to pre-conflict levels — with shipments through the Strait of Hormuz rising to their highest since the Middle East conflict began — has reduced inflation risks globally and lowered the likelihood of aggressive rate hikes. The market now prices only one Bank of England rate increase before year-end, down from two priced in just weeks ago, according to overnight index swap data.

Political Uncertainty Caps Sterling Gains

The pound's recovery faces headwinds from domestic political turmoil. Andy Burnham is widely expected to become the next UK prime minister, but markets remain cautious amid a lack of clarity over his economic policy direction. The uncertainty has kept traders from placing aggressive bullish bets on sterling, limiting GBP/USD's ability to build sustained momentum above 1.3200.

From a technical perspective, the pair's failure to hold above 1.3200 in previous sessions suggests sellers remain active at these levels. A sustained break above 1.3200 could open the path toward 1.3300, while a move back below 1.3140 would expose the November 2025 lows near 1.3050.

Cross-Asset Dynamics Support Dollar Weakness

The dollar's retreat was broad-based. EUR/USD rose back above 1.1400 as lower oil prices improved the outlook for the energy-dependent eurozone economy. The US 10-year Treasury yield edged lower alongside the dollar, while gold held above $4,000 per ounce.

Attention now shifts to next week's US non-farm payrolls report, which could prove the next major catalyst for Fed expectations and, by extension, dollar direction. The University of Michigan consumer sentiment index due later Friday is expected to improve modestly to 50.0 from 48.9.

This article is for informational purposes only and does not constitute investment advice.