Sterling fell after weak UK Q4 GDP data increased expectations of more Bank of England rate cuts. Markets are pricing a 74% chance of a 25 bps cut to 3.50% at the 19 March meeting, and almost 50 bps of easing over the next 12 months.
This week’s UK labour and inflation data will be closely watched for policy clues and near-term GBP moves. The unemployment rate is expected to hold at 5.1% for a third month in December. Private sector regular pay is forecast to slow to 3.4% year on year, down from 3.7% in November and the lowest since November 2020.
Inflation Data In Focus
Headline CPI is expected to ease to 3.0% year on year from 3.4% in December, mainly due to lower utility prices. Core CPI is also seen at 3.0% from 3.2%. Services CPI is forecast at 4.3% from 4.5%, which would be the lowest since March 2022.
UK January retail sales and February PMI data, both due on Friday, should provide a fresh read on current economic activity.
The Pound is underperforming after weak UK growth data for Q4 2025 reinforced our view that the economy is slowing. Markets are now pricing an 80% probability of a Bank of England rate cut at the March 20 meeting. This is similar to early 2025, when weaker data drove higher expectations for policy easing.
With key labour and inflation releases due next week, volatility is likely to increase. One-month implied volatility on GBP/USD options has already risen from 6.8% to 7.9% in February. This suggests traders are preparing for larger price swings. In this setting, option strategies may be more attractive than simple directional trades in the cash market.
Strategy For A Weaker Pound
We think the more cautious way to position for a weaker pound is through derivatives. Buying GBP put options, or using bearish put spreads, can benefit from a decline while keeping risk defined. In the similar 2025 setup, this approach worked well for traders who positioned before the central bank confirmed a more dovish shift.
Still, traders should watch for unexpectedly strong data, especially in the retail sales and PMI reports. February’s flash PMI showed a small surprise improvement in services. If positive surprises continue, markets could quickly scale back rate-cut expectations and the pound could rise sharply.
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