GBP/USD fell by 0.8%, reaching 1.3550. The likelihood that the Bank of England will cut the bank rate by 25 basis points in the upcoming March meeting has increased significantly.
The probability of a rate cut climbed from 18.6% to 61%. There’s also more political risk for the GBP due to a crisis involving Prime Minister Keir Starmer.
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We experienced a similar situation in early 2025 when political instability and changing expectations for rate cuts caused GBP/USD to drop to 1.3550. This steep decline happened quickly as expectations for a March 2025 rate cut surged from under 20% to over 60%. It highlighted how quickly market sentiment can shift.
In March 2025, the Bank of England did cut rates by 25 basis points, just as the market had anticipated. This decision came after UK inflation unexpectedly fell to 3.1% for the year ending January 2025, allowing the central bank to take action. This event set a precedent for the BOE to prioritize growth over maintaining a high base rate.
Current Market Scenario
Now, in February 2026, we see a similar situation emerging. Current UK inflation remains stubborn at 2.9%, but recent business surveys indicate a concerning slowdown in the services sector, a vital part of the UK economy. Currently, the market sees only a 30% chance of a rate cut at next month’s meeting, which seems low given the current data and historical context.
The gap between market pricing and economic reality suggests that implied volatility in GBP options is undervalued. The 3-month GBP/USD implied volatility is around 8.2%, lower than the average of 9.5% seen during last year’s uncertain periods. This creates an opportunity to buy volatility before a potential shift.
Given the risk of another sudden sterling drop, traders might consider purchasing GBP/USD put options with a three-month expiration. This approach provides a straightforward, defined-cost method to profit from a decrease in the exchange rate if the Bank of England indicates a more dovish approach. It reflects the pattern we saw last year.
For those anticipating a significant movement but unsure of which direction it will go, a long strangle could be a better choice. This involves buying both an out-of-the-money put and an out-of-the-money call, allowing traders to profit if GBP/USD moves sharply in either direction. This would be effective if next month’s BOE meeting leads to a major surprise, whether it’s a hawkish hold or an unexpected rate cut.
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