US tariffs are raising UK inflation through higher Chinese export prices, says Bank of England policymaker Catherine Mann. There hasn’t been much shift in trade from China to the UK, and this has affected the UK’s Consumer Price Index (CPI).
Brexit continues to slow down the UK’s economic growth. There are ongoing worries about weak spending and productivity in the UK.
The GBP/USD currency pair is up 0.56%, trading at 1.3695, with this figure updated to show the correct exchange rate.
The Bank of England aims to keep inflation at 2% by adjusting the base lending rate. When inflation goes above this target, interest rates are raised, which can boost the value of the Pound Sterling.
In tough economic times, the Bank of England may use Quantitative Easing (QE) or Quantitative Tightening (QT) to affect the Pound. Although QE usually weakens the Pound, QT is used when the economy is strong and tends to support a stronger Pound Sterling.
Last year, Bank of England policymakers were worried that US tariffs on China were raising UK import prices. This imported inflation was a major concern, even as Brexit and slow productivity hindered the economy. These factors foreshadowed a challenging year for the Pound.
Recent data from January 2026 shows UK CPI inflation at 2.8%, still above the 2% target. Continuing US tariffs on Chinese goods throughout 2025 have clearly kept prices high, putting the Bank of England in a tough spot.
Concerns about slow economic growth are also proving true. Fourth-quarter productivity for 2025 showed a slight contraction of 0.2%. This weak performance likely explains why the BoE has kept its Bank Rate at 5.25% in recent meetings, despite rising inflation. Market expectations for aggressive interest rate hikes have faded, with GBP/USD now near 1.2750, much lower than the 1.3695 a year ago.
For traders, the clash between persistent inflation and a weak economy suggests ongoing volatility for the Pound. Options strategies like buying straddles on GBP/USD could be useful, as they profit from big price changes without needing to predict the BoE’s decisions. This reflects the uncertainty in the market.
Looking ahead, the next UK wage data release could give some direction. A strong number might push the BoE to take a more hawkish stance. In this situation, selling out-of-the-money puts on the Pound could be a strategy to collect premiums, betting that the central bank’s need to tackle inflation will help support the currency and limit major losses in the weeks ahead.
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