**Despite Rising Inflation, BoE Rate Cuts Are Still Possible** A recent BHH report shows there’s over an 80% chance that the Bank of England (BoE) will cut rates by 50 basis points within a year. Other data reveals that the Producer Price Index (PPI) output remained unchanged, with an annual rate steady at 3.4%. Meanwhile, the Retail Price Index (RPI) increased by 0.7% month-over-month, resulting in a yearly rise to 4.2%. Limited data from Canada reveals a 0.6% month-over-month drop in the Industrial Product Price Index for December, falling short of expectations. In contrast, the Raw Materials Price Index increased by 0.5%, exceeding predictions of a 0.5% decline. **Reflections on Last Year** Today is January 21, 2026. The landscape has changed, leaving the Bank of England with less flexibility. The latest stats show UK headline inflation at 2.5%. While this is lower than last year, it remains stubbornly above the 2% target, complicating plans for further rate cuts from the BoE. This uncertainty indicates potential volatility in the GBP/CAD exchange rate around important upcoming data releases. Traders might want to consider options strategies that can capitalize on significant price fluctuations, regardless of the direction. A rise in implied volatility before the next BoE meeting could present a good opportunity for such strategies. On the flip side, Canada’s inflation has decreased more noticeably, now at 2.3%, according to the latest report from Statistics Canada. This allows the Bank of Canada to consider easing its policies sooner than the UK, creating a significant policy divergence. Given this situation, we believe the GBP/CAD exchange rate is likely to rise in the near term. If the BoE keeps rates steady while the Bank of Canada signals cuts, the pound should strengthen against the Canadian dollar. Traders might consider buying GBP/CAD call options to prepare for a possible move above the current 1.8800 level. This outlook is supported by recent UK wage data, which shows average earnings are still increasing at an annual rate of 4.8%. This strong wage growth continues to contribute to service-sector inflation, making the BoE cautious about cutting interest rates too soon. This contrasts with the lower wage pressures currently seen in Canada. We will closely monitor upcoming employment and inflation reports from both countries. The main focus should be on any data that could change expectations about when central banks will adjust rates. Any signs of weakening economic data from the UK could quickly reverse the pound’s recent gains. Create your live VT Markets account and start trading now.

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