21.01.202600:32 Forex Analysis & Reviews: GBP/USD. Between Two Fires

Tuesday's published UK labour figures disappointed, despite most components of the report coming in at forecast levels or in the green. The UK labour market is slowing, which is bad news for the pound, which has weakened across almost all cross-pairs.

However, against the dollar, the British currency has strengthened for a second day in a row. On Monday, GBP/USD hit a six-week low at 1.3341, then reversed 180 degrees and on Tuesday, made a weekly high, approaching 1.35 (1.3490).

Looking at the weekly chart of GBP/USD, we see the pair has shown a pronounced downtrend over the past three weeks. Bears controlled the situation even during periods of general dollar weakness, reflecting the strength of the southward trend. Yet this time the dollar is plunging across the market, allowing GBP/USD buyers to stage a 150-pip correction.

Can we speak of a trend reversal on Tuesday? In my view — no. Accordingly, long positions in the pair also (for now) look very risky.

On the one hand, the dollar is indeed under severe pressure following recent statements and decisions by Donald Trump. His ambitious intentions to establish control over Greenland could lead to heavy economic consequences, especially if the European Union applies the so-called Anti-Coercion Instrument (ACI) against the United States.

On the other hand, the "Greenland case" is ongoing. How it will end is unknown. Recall similar threats/intentions by Trump, for example, regarding Canada. Last year, the US president was quite intent on "annexing" the neighbouring country as the 51st state, threatening Canada with tariffs and other sanctions. Ultimately, those threats did not materialise, although Trump occasionally "remembers" Canada in that context (literally today he posted an image of Canada, Greenland and Venezuela under the US flag).

We can also recall recent threats by the US leader against Iran, where street protests raged for several weeks. The White House chief threatened air strikes on Tehran and urged protesters to "seize government buildings," assuring them that "American assistance is already on the way." But in that case, too, the threats were not realised: Trump unexpectedly softened his rhetoric and shifted attention to Greenland.

As noted above, the "Greenland case" is still evolving. The additional 10% tariffs announced by Trump have not yet come into force, so diplomatic chances are not zero.

In this context, Davos may play a decisive role, as the World Economic Forum is underway there. Within the forum, the US president will meet European leaders, and Greenland will likely be a central topic rather than economics. If the meeting produces conciliatory, de-escalatory statements, the dollar will regain demand and GBP/USD sellers will quickly reclaim lost ground.

But if events follow an escalatory scenario (Trump does not abandon his territorial claims and Brussels applies the ACI), the US currency will face further pressure across the market, including versus the pound.

Given such uncertainty, it is impossible to forecast the direction of GBP/USD, especially since the pair's fate rests in the hands of the unpredictable Trump.

Still, it should be noted that at present GBP/USD is rising "in advance," on the back of Trump's belligerent statements and defensive rhetoric from EU leaders. If Davos brings de-escalation, the pound will be left "one-on-one" with the UK labour report, which painted a pretty bleak picture.

Unemployment in the UK remained at October's level of 5.1% in November (the highest reading since early 2021), whereas most analysts had forecast a slight fall to 5.0%. Unemployment rose notably among youth (ages 18–24), and especially in London (7.2%). Employment fell by 43,000 (the largest decline since late 2020). Initial claimant count increases were almost 18,000 (17.9k), after a 3k decline the previous month. Meanwhile, the earnings measure eased: headline pay slowed to 4.7% (from 4.8% previously), and regular pay excluding bonuses slowed to 4.5% (from 4.6%).

The published data signal a cooling UK labour market. One more "puzzle" remains: inflation. If UK CPI also comes in the "red zone" (the release is due on Wednesday, January 21), market talk about the Bank of England cutting rates in the first half of the year will resume.

Thus, GBP/USD is rising on rather shaky foundations. The price vector depends not only on the outcome of negotiations in Davos but also on UK CPI dynamics. If these fundamental factors align in favour of the GBP/USD bulls (escalation of the Greenland case + accelerating inflation), the pair will test resistance at 1.3550 (the upper Bollinger Band on D1). But if events take a de-escalatory path and CPI prints in the red zone, the pair could return to the lower Bollinger Band on D1 at around 1.3370.