GBP/USD holds above key level, despite rate divergene and trade war jitters

• GBP/USD trades flat near 1.3638 amid Fed-BoE policy divergence.
• US NFP beat and falling jobless claims support the Dollar.
• Trump tariff threats revive risk-off mood, dampening Sterling's appeal.
• UK Chancellor warns of tax hikes post welfare U-turn; GDP and output data eyed.

The Pound Sterling is virtually unchanged during the North American session, yet it remains above a key technical level, following a solid US jobs report in the United States (US). This, along with the likelihood of further tax hikes by the UK government, is exerting pressure on Cable. At the time of writing, the GBP/USD exchange rate is 1.3638.

Sterling steadies near 1.3640 as strong US data and looming UK tax hikes weigh on sentiment; rate cut odds favor USD upside

Last week, the US revealed that the Nonfarm Payroll figures exceeded estimates of 110K, coming in at 147K, while the Unemployment Rate ticked lower. Additionally, wages remain steady, and the number of Americans filing for unemployment benefits has dipped.

Risk appetite shifted slightly sour, as traders' attention returned to US trade policy, particularly tariffs. US President Donald Trump announced that over ten to twelve letters would be sent later during the day to some trade partners, setting tariffs on those countries, adding to investors' angst and fears that the trade war would continue.

In the UK, the Finance Minister Rachel Reeves warned ministers that taxes would need to increase after the government's U-turn on welfare reform. In the meantime, traders are focusing on the BRC Retail Sales report, the Bank of England's Breeden speech, and the release of Gross Domestic Product (GDP) figures, as well as Industrial and Manufacturing Production data.

Across the pond, traders will be watching the release of the Federal Open Market Committee (FOMC) meeting minutes, Initial Jobless Claims data, and speeches by the Federal Reserve.

Fed vs. BoE Interest Rates Expectations

The Federal Reserve is expected to hold rates unchanged at the July 30 meeting, with odds at 80.37%. Money market futures had projected 50 basis points of easing by December 2025.

The Bank of England's chances of a 25-basis-point cut at the August 7 meeting are at 73.81%, which would bring the Bank Rate to 4.25%. Traders had priced in over 53 basis points of easing toward the end of the year.

Fed Interest Rate Probabilities - Prime Market Terminal

BoE Interest Rate Probabilities - Prime Market Terminal

Therefore, further central bank divergence might exert pressure on the GBP/USD and boost the Greenback's prospects as the interest rate differential might benefit the US.

GBP/USD Price Forecast: Technical outlook

The GBP/USD uptrend remains intact, but momentum seems to be faltering. The Relative Strength Index (RSI) is dipping towards its neutral line. Hence, a pullback toward the 1.3600 figure, and below is on the cards.

In that outcome, key support levels would be the July 2 daily low at 1.3561, followed by 1.3500 and the 50-day SMA at 1.3473. On the upside, if GBP/USD climbs past the July 4 daily high, it would be up next at 1.3681, which would put 1.3700 in play. A breach of the latter will expose the YTD peak at 1.3788.