The pound slipped in light trading on Monday as US markets were closed for President’s Day. GBP/USD traded at 1.3635, down 0.12% during the North American session.
Markets were mixed after last week’s US inflation report showed prices cooling. This raised expectations of more Federal Reserve rate cuts. With few major releases due in the US or UK, attention turns to UK labour market data on Tuesday and CPI on Wednesday.
Uk Inflation Outlook
UK CPI in January is forecast to fall -0.5% month-on-month and rise 3% year-on-year, both lower than December. If inflation eases again, markets may price in more Bank of England rate cuts.
A Reuters poll found that over 60% of economists (41 of 63) expected the BoE to cut rates by 25 basis points to 3.50% at the 19 March meeting. The survey ran from 10–16 February. UK political tensions also eased after Labour backed Prime Minister Keir Starmer, following debate over appointing Peter Mandelson as ambassador to the US.
In the US, key events include Fed speeches, durable goods orders, housing data, and the FOMC meeting minutes. On the technical side, GBP/USD was near 1.3633. Support is seen around 1.3518 and 1.3506, along with a rising trend line from 1.3035.
A year ago, in mid-February 2025, markets were positioned for a BoE rate cut. Investors expected January 2025 inflation to drop to 3%, and more than 60% of economists in polls predicted a cut at the March meeting. GBP/USD held firmly above 1.3600 on this view.
But the data proved those expectations wrong. January 2025 inflation came in higher at 3.2%. The BoE then held rates at 3.75% in March 2025, and the pound fell. This shows how one inflation report can quickly change both central bank policy and market direction.
Current Market Setup
Today, the picture is very different. UK inflation for January 2026 came in at 2.1%, much closer to the BoE’s 2% target. Since then, the central bank has cut rates to 2.75%. GDP for Q4 2025 also showed weak growth of just 0.1%, adding pressure for more policy support.
With inflation largely under control and growth still weak, we think the BoE may cut rates again in the coming months. This would likely weigh on sterling, with GBP/USD now trading near 1.2950. Derivatives traders may want to consider strategies that benefit if the pair falls.
One approach is to buy GBP/USD put options with a strike near 1.2800 and an expiry in late March. This can profit from a move lower while limiting risk to the premium paid. The trade also reflects a widening gap between a more dovish BoE and a more patient Federal Reserve.
Traders should also watch implied volatility, which often rises ahead of a BoE rate decision. If volatility looks expensive, a bear put spread may be a lower-cost way to take the same view. This involves buying a higher-strike put and selling a lower-strike put to reduce the total premium.
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