The GBP/USD pair has stabilized, supported by a weaker US dollar, even though the UK labor market data is mixed and there are worries about declining wage growth. The British Pound is being cautious, with key inflation data due Wednesday likely to impact the Bank of England’s (BoE) policy outlook.

Global Risk Sentiment and Trade Uncertainties

Market conditions are keeping pressure off the Pound as global risk sentiment is influenced by geopolitical tensions and trade uncertainties. The US dollar’s weakness aids Sterling, despite concerns over UK data. GBP/USD has seen slight gains this week, mainly due to the softness of the US dollar rather than strong UK economic indicators. Movements of the pair are restricted by weak UK labor statistics and uncertainty about the BoE’s monetary policy. Wednesday’s UK Consumer Price Index (CPI) inflation report will be crucial in guiding GBP/USD’s near-term direction. Sterling continues to play a significant role in the foreign exchange markets, making up 12% of daily transactions that average $630 billion. The value of the Pound largely depends on the Bank of England’s monetary policy, with economic indicators like GDP and the trade balance also significantly affecting its strength or weakness. The Pound is managing to stay firm against the dollar, but there is a cautious atmosphere ahead of the essential UK inflation data. The broader weakness of the US dollar provides some support, caused by new trade uncertainty between the US and the European Union. However, the main focus for Sterling traders remains the domestic situation in the UK. The recent UK labor market data showed a slowdown in wage growth to 4.1%, which continues to dampen sentiment. This has sparked discussions about the pace at which the Bank of England (BoE) will implement rate cuts in 2026 after starting its easing cycle late last year. Looking back, inflation was persistently high throughout 2024 and 2025, making the central bank cautious about acting too quickly.

Inflation Data and Market Expectations

Today’s CPI release for December is the key event that will likely influence the Pound’s direction in the upcoming weeks. The market anticipates a slight increase in the annual inflation rate to 2.8%. If this is confirmed, it could delay the expectations for the BoE’s next rate cut. Recent data from the derivatives market indicates that traders now see only a 40% chance of a rate cut by the end of the first quarter, down from 75% just a month ago. The main reason why Cable (GBP/USD) hasn’t dropped further amidst these UK-specific concerns is the weakness of the US dollar. Recent tariff announcements have hurt investor sentiment towards the US, reducing the demand for the greenback. This situation is keeping GBP/USD steady within a tight range as we await the CPI data. Given the uncertainty surrounding the inflation data, a significant price movement in either direction is likely. This points to using options to trade potential volatility instead of taking a direct position beforehand. Strategies like buying a straddle or a strangle could be wise ways to profit from a sharp move, whether the inflation report is higher or lower than expected. Create your live VT Markets account and start trading now.

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