UK headline CPI rose 3.0% year-on-year in January, down from 3.4% in December, according to the Office for National Statistics. The reading matched market forecasts and stayed above the Bank of England’s 2% target.
Core CPI rose 3.1% year-on-year, versus 3.2% in December, and also met expectations. Monthly CPI fell -0.5% in January, after rising 0.4% in December, in line with consensus.
Gbp Reaction And Boe Outlook
After the data, GBP/USD was up 0.01% at 1.3562, after trading near 1.3556 earlier. The Bank of England has said inflation pressures should ease to around 3% in Q1 2026 and move closer to 2% in Q2.
Key technical levels mentioned included the 20-period EMA at 1.3593 and the 14-day RSI at 39. Other reference points were 1.3500 and 1.3400, along with a “Symmetrical Triangle” or “Volatility Contraction Pattern”.
The Bank of England targets 2% inflation and adjusts interest rates to influence financial conditions. It can also use quantitative easing or quantitative tightening, which can influence the Pound.
January’s inflation data matched expectations at 3.0%. Inflation is cooling from the 3.4% seen in December 2025, but the overall picture for the Pound is largely unchanged. With no surprise in the data, the currency barely moved and remained weak near 1.3560 against the dollar.
Growth Risks And Rate Cut Debate
This leaves the Bank of England in a tough position. Inflation is still about a full percentage point above the 2% target. At the same time, the economy is clearly slowing, which is likely to increase pressure for rate cuts over the year.
Recent data showed the UK entered a technical recession in the second half of 2025. GDP fell 0.1% in Q3 and 0.3% in Q4.
The outlook weakened further after ONS data showed retail sales volumes dropped 3.2% in January 2026, the largest fall in more than a year. Softer consumer spending supports the view that the Bank may prioritize growth over removing the remaining inflation. As a result, further rate hikes look unlikely, and attention is shifting to when the first rate cut may happen.
For traders, this supports a bearish view on the Pound in the weeks ahead. In 2025, markets focused on how high rates would need to go to curb inflation. Now the focus is on how weaker growth could push the Bank of England to ease policy later this year.
With inflation easing but growth stalling, volatility could pick up. Options may be a practical way to express a bearish GBP/USD view. Buying put options can benefit from a decline in the currency while keeping maximum loss fixed.
Technically, GBP/USD remains in a downtrend and is trading below key moving averages. A break below the recent low at 1.3500 would suggest the downtrend is continuing. The next major target for sellers is 1.3400.
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