GBP/USD rose for a fifth day in a row, trading near 1.3560 in early European hours on Thursday. The pair stayed firm as the US Dollar weakened, with markets unsettled by uncertainty over White House economic policy. In his State of the Union address on Tuesday, US President Donald Trump said the US economy is rebounding. He defended tariffs as helping growth and criticised the Supreme Court for striking down part of his tariff policy.

BoE Rate Cut Expectations

Further gains in GBP/USD may be capped by expectations that the Bank of England will take a more dovish path. Markets are leaning toward an interest rate cut in March, driven by a softer UK labour market and easing inflation. MPC member Alan Taylor said two to three near-term rate cuts could be needed, pointing to risks to employment and easing price pressures. UK CPI inflation fell to 3.0% in January from 3.4% in December. That was the lowest level since mid-2025 and a larger drop than expected. BoE Governor Andrew Bailey told Parliament’s Treasury Committee that a March cut is “a genuinely open question”. He noted services inflation was 4.4% in January versus the BoE projection of 4.1%. Meanwhile, Chief Economist Huw Pill warned against being “beguiled” by headline inflation moving closer to the 2% target. GBP/USD is holding up for now, mainly because uncertainty around US economic policy is weighing on the dollar. That dollar weakness is giving the pound short-term support and keeping the pair near 1.3560. However, the setup looks fragile and may create a clear trading opportunity.

Historical Sterling Reaction

The key issue is the strong expectation that the Bank of England will cut rates in March. The January inflation drop to 3.0%, which was sharper than forecast, reinforces this view. Market pricing from Overnight Index Swaps now points to a more than 70% chance of a 25-basis-point cut next month. History also matters. In past easing cycles, such as 2020, Sterling often came under pressure after the first rate cut. That differs from much of 2025, when the pound was relatively steady as policy stayed on hold. This pattern suggests Sterling may have more downside once a cut is confirmed. On the other side, the US dollar’s weakness is being driven by politics and headlines, including Trump’s tariff comments in the State of the Union address. While that uncertainty is supporting GBP/USD for now, US data has remained firm. For example, job reports from early February 2026 still showed a tight labour market, which makes the case for a weaker dollar less clear-cut. Given this backdrop, traders may want to prepare for a fall in GBP/USD ahead of the March central bank meeting. One approach is to buy GBP/USD put options, which can benefit from a decline while limiting losses if dollar weakness unexpectedly deepens. Recent Commodity Futures Trading Commission (CFTC) data also shows large speculators have increased net short positions in Sterling in recent weeks. Create your live VT Markets account and start trading now.

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