GBP/USD stayed positive for a fifth straight day, trading near 1.3560 in early European hours on Thursday. The pair held firm as the US Dollar weakened amid uncertainty about White House economic policies.
In his State of the Union address on Tuesday, US President Donald Trump said the US economy is rebounding. He defended tariffs as supportive of growth and criticised the Supreme Court for striking down part of his tariff policy.
BoE Rate Cut Expectations
Gains in GBP/USD may be limited by expectations of a more dovish Bank of England path. Markets expect an interest rate cut in March, linked to weaker UK job market conditions and cooling inflation pressures.
MPC member Alan Taylor called for two to three near-term rate cuts, citing employment risks and easing price pressures. UK CPI inflation fell to 3.0% in January from 3.4% in December, the lowest since mid-2025 and a bigger drop than expected.
BoE Governor Andrew Bailey told Parliament’s Treasury Committee that a March cut remains “a genuinely open question”. He said services inflation was 4.4% in January versus the BoE projection of 4.1%, while Chief Economist Huw Pill warned against being “beguiled” by headline inflation moving towards the 2% target.
We see that GBP/USD is holding its ground for now, largely because of uncertainty surrounding US economic policy. This dollar weakness is providing a temporary floor for the pound, keeping the pair elevated around the 1.3560 level. However, this situation appears fragile and presents a clear opportunity.
Historical Sterling Reaction
The focus should be on the overwhelming expectation that the Bank of England will cut interest rates in March. The recent drop in UK inflation to 3.0% in January, a sharper fall than anticipated, strongly supports this view. We see that market pricing, based on Overnight Index Swaps, now implies a greater than 70% probability of a 25-basis-point cut next month.
Looking back, we remember that during previous easing cycles, like the one we saw in 2020, Sterling often faced initial downward pressure following the first rate reduction. This contrasts with the period of relative stability we observed through much of 2025, when monetary policy was held steady. This historical pattern suggests the path of least resistance for the pound is lower once a cut is confirmed.
On the other side of the trade, the US dollar’s weakness is tied to political headlines, such as the tariff defense in the recent State of the Union address. While this uncertainty is currently supporting GBP/USD, US economic data has remained resilient. For instance, the latest job reports from early February 2026 continued to show a tight labor market, which complicates the narrative of a weakening dollar.
Therefore, traders should consider positioning for a drop in GBP/USD heading into the March central bank meeting. Buying put options on GBP/USD would be a prudent strategy, as it allows for profiting from a decline while capping potential losses if dollar weakness unexpectedly intensifies. We are already seeing positioning data from the Commodity Futures Trading Commission (CFTC) showing that large speculators have been increasing their net short positions on Sterling over the last few weeks.
