GBP/USD's Third Day Slide: A Tactical Setup After Strong US Jobs Data

The immediate trigger for the pound's third straight day of decline was a wave of unexpectedly strong US economic data. The first shot came from the ISM Services Purchasing Managers' Index, which for December rose to 54.4 from 52.6 in November. That figure, which marked the highest level since October 2024, was a clear beat against the economists' expectation of 52.3. The subcomponents, including the Employment and New Orders indices, also came in stronger than the prior month.

This upbeat services report was quickly followed by the official December jobs picture. The Labor Department's report showed total nonfarm payroll employment increased by 50,000 jobs, while the unemployment rate dipped to 4.4% from 4.5% in November. Both numbers were in line with or slightly above expectations, which had called for a gain of 60,000 jobs.

The combined effect was a direct challenge to the narrative of a rapidly deteriorating US labor market. For months, softer economic data had supported the idea that the Federal Reserve was on a dovish path, cutting rates three times in 2025 to backstop weakening conditions. The strong PMI and resilient jobs report suggest the economy is holding up better than feared, which clouds the case for further rate cuts. This shift in the Fed's outlook is the core reason the US dollar is trading firmly, putting direct pressure on the pound.

The Mechanics: How Data Moves the Dollar

The path from strong US data to a weaker pound is a direct chain of cause and effect. The initial trigger is the shift in expectations for Federal Reserve policy. When the ISM Services PMI and jobs report show resilience, they directly challenge the narrative that the US economy is cooling fast enough to warrant aggressive rate cuts. As analysts noted, soaring US services clouds the Fed rate cut story.

This changes the fundamental math for currency traders. Higher interest rates make the US dollar more attractive for carry trades, where investors borrow in low-yielding currencies and invest in higher-yielding ones. The stronger data increases the probability that the Fed will keep rates higher for longer, boosting the dollar's yield advantage. This is the core mechanism driving the dollar's strength and the pound's decline.

The data also points to persistent inflation risks, specifically in the service sector. The ISM Services PMI showed that inflation risks in the service economy are still high, as evidenced by stable prices paid for parts. This is a critical detail because services inflation is often more sticky and harder to tame than goods inflation. When the Fed sees inflation pressures remaining elevated in a key sector like services, its case for cutting rates becomes much weaker.

Put simply: stronger US data → higher probability of sustained high interest rates → increased attractiveness of the dollar for carry trades → direct pressure on the GBP/USD pair. The pound's appeal diminishes because the dollar is now offering a better yield differential, and the broader dollar index is moving higher as a result. This is the tactical setup in motion.

The Setup: Valuation and Key Levels

The tactical picture for GBP/USD is now one of clear tension. The pair is trading at $1.3444, having fallen from a recent high of $1.3567 hit on Tuesday. This sets up a defined range for the near term, with the 1.35 level acting as immediate psychological and technical resistance. Below that, the 1.3400-1.3450 zone represents the key support cluster. The immediate setup is a battle between these levels, with the data-driven dollar strength pushing price toward the lower end of the range.

This creates a classic event-driven conflict. On one side, the strong US economic data has provided a clear catalyst for a three-day decline, directly challenging the Fed's dovish narrative and boosting the dollar's yield appeal. On the other side, the broader strategic outlook for the dollar remains bearish. Currency strategists polled by Reuters still see a bearish dollar trend for 2026, driven by fiscal concerns and potential Fed easing. This sets up a potential inflection point: the data can push the pound lower in the short term, but the longer-term structural weakness in the dollar could cap the decline.

The near-term path depends on the next catalyst. With UK GDP data due next week and jobs data the week after, the immediate focus is on the dollar. If the dollar's recent strength is seen as a reaction to the jobs data and not a new trend, the 1.3400-1.3450 support zone could hold. A break below that would signal the data-driven move is gaining traction. Conversely, if the dollar falters on thin trading or softer-than-expected US inflation data (CPI, PPI) this week, the 1.35 level could act as a magnet, offering a tactical short-term rally for the pound. The setup is a range-bound tug-of-war, where the event-driven catalyst must overcome the structural trend to change the direction.

Catalysts and Risks: What to Watch Next

The tactical setup now hinges on the next wave of data. The immediate focus is on the US labor market, where the recent jobs report has already shifted the narrative. The next major test is the weekly Initial Jobless Claims report, due later in the week. A jump in claims would signal a cooling labor market and could undermine the recent strength, offering a potential short-term rally for the pound. Conversely, a decline would confirm the resilience story and likely extend the dollar's momentum.

Then comes the big one: the anticipated Nonfarm Payrolls (NFP) reading. This is the critical catalyst that will determine if the current dollar strength is a sustainable trend or a reaction to a single data point. The market is already pricing in a slowdown, with expectations for a gain of around 60,000 jobs. A figure that matches or beats that level would solidify the case for the Fed keeping rates higher for longer, pushing the dollar higher and the pound lower. A miss, however, would challenge the narrative and could trigger a sharp reversal.

The key risk is that the dollar's strength is overdone on a single data point. The broader bearish dollar trend from 2025 remains intact, driven by persistent fiscal concerns and the expectation of future Fed easing. As the Reuters poll shows, strategists still see a bearish dollar trend for 2026. If the upcoming NFP data fails to confirm the resilience, the dollar's recent rally could prove fleeting, and the pound could reclaim lost ground.

For the pound, the next major catalyst is UK GDP data, due next week. This will provide clearer insight into domestic economic strength independent of dollar moves. The market is waiting for this data to gauge whether the UK economy is holding up well enough to support the currency's recent gains. Until then, sterling's path will be largely dictated by the dollar's fortunes.