Pound Sterling rose against most major currencies, but not against antipodean ones. It was up 0.23% to near 1.3520 versus the US Dollar during the European session on Wednesday.
The move came despite dovish comments from Bank of England Governor Andrew Bailey. On Tuesday, he told Parliament’s Treasury Committee there is scope for interest rate cuts if inflation returns to the 2% target.
Bailey Keeps Rate Cut Timing Unclear
Bailey did not commit to a cut at the next policy meeting. He said a rate cut at the next meeting is “a genuinely open question”.
On Monday, Monetary Policy Committee member Alan Taylor called for two to three rate cuts in the near term. He cited downside risks to employment and easing inflation pressures.
A weaker US Dollar also supported GBP/USD. The US Dollar Index was down 0.2% at around 97.65.
The US Dollar eased after President Donald Trump’s State of the Union address to Congress. He praised economic achievements and criticised the Supreme Court for ruling against tariffs.
Looking Back At Early 2025
Looking back at this time last year, in early 2025, we saw the Pound gaining ground despite the Bank of England signaling a clear path towards interest rate cuts. The market was focused on dovish comments from Governor Bailey and other MPC members who were concerned about rising unemployment. At the time, a weak US Dollar was also helping push GBP/USD up towards the 1.35 level.
The situation has changed significantly since those views were expressed. The two rate cuts we saw in mid-2025 did not fully tame inflation, which came in at a sticky 2.8% in the latest data from January 2026, still well above the 2% target. Consequently, market expectations have shifted, and futures markets are now pricing in only one potential BoE rate cut for the remainder of this year, a stark contrast to the two or three that were anticipated back then.
On the other side of the pair, the US Dollar did not continue the weakness seen in early 2025. Resilient economic data and a Federal Reserve focused on stubborn service-sector inflation have pushed the Dollar Index up from the 97s to around 104.50 today. This dollar strength is the primary reason we see GBP/USD trading closer to 1.2550, a significant drop from the levels discussed a year ago.
Given this divergence, we believe traders should consider strategies that benefit from volatility around key data releases. Buying straddles or strangles on GBP/USD options ahead of the next BoE meeting or UK inflation report could be prudent. This allows a trader to profit from a large price move in either direction, as the market is clearly torn between sticky inflation and a slowing economy.
For those with a directional view, the previous strong trend of GBP weakness may be losing steam now that the BoE’s hands are tied by inflation. We could consider cautiously buying GBP futures, as the worst of the dovish repricing appears to be over. Hedging this position with shorts in EUR/GBP could offer some protection, as the Eurozone economy continues to show more profound signs of weakness.
However, the employment risks mentioned in 2025 have not vanished, with the UK unemployment rate ticking up to 4.5% last month. Any further deterioration in the labour market could force the BoE to reconsider its stance, making long GBP positions vulnerable. Therefore, we advise using tight stop-losses on any bullish sterling trades in the coming weeks.
