Sterling slipped against major currencies on Thursday after softer UK data. Even so, GBP/USD stayed above 1.3600 and edged up to around 1.3640, extending a mild rebound from last week’s lows.
Early UK GDP figures showed growth of 0.1% in Q4 2025 and 1.0% year on year. Markets had expected 0.2% for the quarter and 1.2% for the year. Q3 GDP was also revised down to 1.2% from 1.3%.
Uk Output Weakness Weighs On Sterling
Weakness in manufacturing and services held back activity in Q4. Manufacturing output fell 0.5% in December after a 1.9% rise in November (revised from 2.1%). Services output was flat in Q4, missing expectations for a 0.2% increase.
Markets are now pricing in more Bank of England rate cuts to support growth. That expectation could limit demand for the pound.
In the US, nonfarm payrolls beat forecasts, which reduced expectations for near-term Federal Reserve rate cuts. However, the January job mix and a sharp revision to 2025 jobs growth have limited the US dollar’s rebound.
With UK data disappointing, we view the pound’s ability to hold above 1.3600 as a potential selling opportunity. The weak 0.1% Q4 growth, together with shrinking manufacturing output, suggests the Bank of England may need to cut rates. Expectations for lower borrowing costs are likely to cap sterling gains in the near term.
Policy Divergence Favours The Dollar
The contrast with the US is growing. A strong nonfarm payrolls report gives the Federal Reserve more reason to keep rates unchanged. This policy gap—UK easing while the US stays on hold—is typically bearish for GBP/USD. As that view strengthens, the pound may face further downside pressure.
UK headline CPI fell to 2.8% in January, down sharply from 4.5% in mid-2025, which gives the BoE more room to ease. By contrast, US core PCE—the Fed’s preferred inflation measure—has stayed above 3.0%, which reduces the chance of near-term US rate cuts. This widening inflation gap supports the case for a weaker pound.
In the weeks ahead, consider buying GBP/USD put options with strikes below 1.3500 to position for a decline. This approach limits risk while keeping exposure to a move toward the 1.3400 support area seen late last year. Another option is to short GBP/USD futures near the current 1.3640 level for a more direct bearish trade.
Historically, when UK quarterly growth stalls like this, sterling often underperforms over the next one to two months. Recent Commitment of Traders reports also show net short positions in the pound building, suggesting larger market participants share a bearish view. Implied volatility may rise, so entering positions before a BoE rate cut is fully priced in could be beneficial.
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