The Pound Sterling fell below 1.3700 and dropped 0.2% during Tuesday’s North American session. GBP/USD traded at 1.3660 after hitting a daily high of 1.3700.
The move came after the US dollar recovered from earlier losses, even though US data was weaker than expected. The pair also came under pressure from political uncertainty in the UK.
Shifting Dynamics In Favor Of The Dollar
A few years ago, we saw a similar setup when GBP/USD slipped below 1.3700 due to weak US data and political issues in the UK. In February 2026, the setup looks different. The main drivers are diverging again, but this time the shift favors the dollar.
The US economy is showing unexpected strength, which is a change from the softer conditions seen in parts of 2025. January’s non-farm payrolls rose by more than 280,000, and the latest CPI report showed inflation picking up to 3.5%. With growth and inflation running hotter, the Federal Reserve is less likely to cut rates again. That helps support the dollar.
At the same time, Sterling is facing pressure from uncertainty around the new government’s first full budget. UK inflation remains sticky at 2.8%, while last quarter’s GDP was flat. This leaves the Bank of England in a tough spot: it needs to control inflation, but it also needs to support a stalled economy. This lack of clear direction could weigh on the pound.
Because of this divergence, the outlook for GBP/USD looks bearish into March. Traders may consider buying April-expiration put options to potentially benefit from further downside. This approach limits risk to the premium paid while still giving exposure to a drop in the exchange rate.
Options Strategy Amid Rising Volatility
UK politics, combined with stronger-than-expected US data, could increase price swings. In this kind of market, options can be appealing, since rising implied volatility can help buyers of puts or calls. We see a higher chance of a drop toward the 1.2200 area last seen in late 2025 than a sustained break to the upside.
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