Sterling is poised for a cautious recovery against the dollar, as markets balance upbeat retail sales data against a backdrop of, for now, diminishing geopolitical volatility and persistent inflationary pressures.

The currency managed a notable rebound from overnight lows of 1.3455, bolstered by stronger-than-expected UK retail sales figures that provided a much-needed bullish lift to sentiment. Despite today's bounce, dour Bank of England inflationexpectations are set to remain a primary driver, potentially inhibiting further gains for the pound even if current Middle East tensions begin to abate.

Nevertheless, the UK's inflation-growth dilemma remains a significant concern. With Brent crude oil prices hovering around $100/bbl and forecasts indicating sustained high levels for the foreseeable future, as oil markets normalize, the cost-of-living crisis is likely to hinder economic growth.

Market expectations reflect this "higher for longer" scenario, with LSEG's IRPR discounting approximately 58 basis points of BoE rate hikes anticipated starting in the second half of 2026. As a result, upside potential for GBP/USD may be capped near early-February highs just above 1.37.

From a technical perspective, GBP/USD faces immediate resistance at the 10-DMA of 1.3518 and the daily cloud top at 1.3544. On the downside, initial support is provided by the bruised 100-DMA at 1.3461, while more critical support lies at the 200-DMA at 1.3415 and daily cloud base at 1.3396.
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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)