Sterling's recent climb past 1.36 appears set to continue, spurred by the U.S. Treasury's decision to increase its long-end Treasury buyback program announced on Wednesday.

This move weakened the U.S. dollar, propelling cable to a three-month high of 1.3661 on Thursday, even as long-end UST yields experienced a slight rebound. Despite the dollar's dip, underlying U.S. fiscal concerns are unlikely to subside without a reduction in Treasury issuance, a development closely tied to November's refunding announcement.

Near-term market sentiment is being shaped by policy expectations for both the Fed and the Bank of England. LSEG's IRPR indicates a potential 25 basis point Fed hike in 2026, with nearly 50% odds for a second in late 2027. The BoE is also anticipated to hike once in 2026, with slightly more aggressive projections for 2027. This alignment in rate expectations is likely fueling the unwinding of short sterling positions among IMM speculators, a trend further supported by recent Reuters polls suggesting a more dovish Fed outlook into 2026 than current futures data on LSEG's IRPR suggests. However, GBP/USD bulls might encounter headwinds from ongoing geopolitical tensions in the Middle East. Persistent instability, especially concerning oil flows through the Strait of Hormuz, could risk dislodging inflation expectations. If this scenario unfolds, the dollar could reassert its safe-haven status, buttressed by a prolonged period of high U.S. interest rates.

Currently, resistance for GBP/USD is observed near today's trend high of 1.3660, followed by the February 4 peak of 1.3733. Support is found at the 10-day moving average of 1.3534, with bulls maintaining control as long as the price stays above the 200-day moving average at 1.3423.
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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)