GBP/USD declined by 0.8% to 1.3550. There is an increased expectation that the Bank of England will reduce the bank rate by 25 basis points at the upcoming March meeting.
The probability of a rate cut rose from 18.6% to 61%. Additionally, there is an increased political risk premium for GBP due to a crisis concerning Prime Minister Keir Starmer.
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We saw this exact scenario play out in early 2025 when a combination of political turmoil and shifting rate cut odds sent GBP/USD tumbling to 1.3550. That sharp move was triggered when market expectations for a March 2025 rate cut jumped from under 20% to over 60% in a very short period. This created a perfect storm for sterling weakness, reminding us how quickly sentiment can turn.
The Bank of England did indeed cut rates by 25 basis points in March 2025, as the market had predicted. The move was a response to UK inflation falling faster than expected, dropping to 3.1% in the year to January 2025, which gave the central bank room to act. Looking back, this event established a precedent for the BOE prioritising growth over a stubbornly high base rate.
Current Market Scenario
Now, in February 2026, we see echoes of this situation developing again. Current UK inflation has proven sticky at 2.9%, but recent business surveys show a worrying slowdown in the services sector, a key engine of the UK economy. The market is currently pricing in only a 30% chance of a rate cut at next month’s meeting, which seems low given the historical context and weakening data.
This divergence between market pricing and economic reality suggests implied volatility in GBP options is too cheap. The 3-month GBP/USD implied volatility is currently trading near 8.2%, below the average of 9.5% we saw during the uncertain periods of last year. This presents an opportunity to buy volatility before a potential repricing event.
Considering the risk of another sudden sterling downturn, traders should consider buying GBP/USD put options with a three-month expiry. This strategy offers a clear, cost-defined way to profit from a fall in the exchange rate if the Bank of England signals a more dovish stance. It directly plays on a repeat of the pattern we witnessed this time last year.
For those expecting a significant move but unsure of the direction, a long strangle might be more appropriate. By buying both an out-of-the-money put and an out-of-the-money call, traders can profit if GBP/USD breaks sharply in either direction. This would be effective if the BOE meeting next month delivers a major surprise, be it a hawkish hold or an unexpected rate cut.
