The Pound Sterling (GBP) went down against major currencies as traders awaited the Bank of England’s (BoE) decision on monetary policy. Interest rates are expected to stay at 3.75%, likely with a 7-2 voting majority. Many believe the BoE will maintain its current policy after cutting rates by 25 basis points in December. Attention is also on Governor Andrew Bailey’s press conference for updates on employment and inflation. The BoE had previously forecasted inflation to near 2% by the second quarter of 2026.

GBP Performance Against Other Currencies

The GBP dropped against the US Dollar (USD), trading close to 1.3660, and around 0.8630 against the Euro (EUR). The USD gained strength even amid a partial US government shutdown. The US Dollar Index (DXY) reached a weekly high of 97.73. The USD was boosted by Kevin Warsh’s nomination as Federal Reserve chair and growth in the manufacturing sector. The ISM reported that the Manufacturing PMI rose to 52.6 in January. Market focus will shift to the US ADP Employment Change and ISM Services PMI data, which are key for understanding employment during the shutdown. The EUR/GBP currency pair rose as both BoE and ECB policy decisions approached, with ECB interest rates expected to remain steady. We are watching the Bank of England this Thursday. Markets expect rates to hold at 3.75% after the 25 basis point cut from December 2025. However, recent data showed UK inflation stubbornly at 4.0% in December, complicating the BoE’s path. This makes Governor Bailey’s comments on the inflation outlook crucial for the Pound’s direction.

US Data Impact on Market Sentiment

The strength of the US Dollar is a significant theme, driven by the strong ISM Manufacturing figure of 52.6 and optimism about the new Fed chair. This view is reinforced by the latest Nonfarm Payrolls report from January, which showed an unexpected gain of 353,000 jobs, much higher than expected. This strong labor market data makes the upcoming ADP and ISM Services figures vital for confirming economic strength. Given the solid US data and uncertainty surrounding the BoE, we could see increased volatility in GBP/USD. Traders in derivatives might consider strategies that profit from sudden moves, such as long straddles, as we approach the central bank announcements on Thursday. The technical outlook shows the pair holding above its 20-day EMA near 1.3685, but a surprisingly dovish BoE could break that support. The EUR/GBP cross is also noteworthy, as both the BoE and ECB will announce policies on the same day. While the ECB is likely to keep rates unchanged, the latest Eurozone HICP inflation reading for January came in at 2.8%, still above their target. This indicates the ECB may not signal rate cuts soon, possibly giving the Euro an advantage against a cautious Pound. We should remember how the market reacted in late 2024 when the BoE kept rates steady despite strong signals for a cut, causing a significant rise in the Pound. Implied volatility for one-week GBP options has increased to 8.5%, indicating that the market is expecting a larger-than-usual move this week. This suggests that positioning for a surprise, rather than just the anticipated hold, could be a smart strategy. Create your live VT Markets account and start trading now.

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