UK inflation data on Wednesday showed headline CPI at 3%, while the Retail Price Index fell to 3.8% from 4.2%. Tuesday’s labour report showed unemployment at 5.2% and payrolls down by 30K, alongside expectations for further Bank of England rate cuts from 3.75%.
In the US, the Federal Reserve kept rates at 3.50% to 3.75% at its January meeting in a 10-2 vote, with two members dissenting in favour of a cut. FOMC minutes due today, plus US housing and durable goods data, are set to add detail on policy direction.
Technical Picture For GBPUSD
GBP/USD edged lower on Wednesday and settled near 1.3540 in a quiet session with about a 50-pip range. It is testing the rising 50-day EMA at 1.3534 for the first time since mid-January, while the 200-day EMA sits at 1.3362 and is also rising.
After a year-to-date high of 1.3869 in late January, the pair has made lower highs, with the drop speeding up after it fell below 1.3600 this week. The Stochastic Oscillator has turned bearish and is moving towards oversold.
A daily close below the 50-day EMA could target 1.3400, while a move back above 1.3600 would be needed to steady the pullback.
Looking back to this time in 2025, we saw a clear signal for a weaker pound as UK inflation and labor data softened considerably. The Bank of England was poised to cut rates from 3.75%, while the Federal Reserve appeared more hesitant. This fundamental divergence correctly pointed towards the GBP/USD pair breaking below its 50-day moving average and trending lower for the subsequent two quarters of that year.
Policy Divergence In 2026
The situation today, in February 2026, has evolved significantly from what we observed last year. The Bank of England has now held its key rate steady at 3.25% for three consecutive meetings, citing persistent wage growth which is currently running at a 4.1% annual pace. This is a stark contrast to the aggressive cutting cycle that was anticipated throughout most of 2025.
Meanwhile, the US economy is showing more definitive signs of slowing, with the most recent Non-Farm Payrolls report for January 2026 coming in at just 85,000, well below consensus estimates. US core PCE, the Fed’s preferred inflation gauge, has also cooled to 2.9%, increasing market bets on a Fed rate cut by mid-year. This has flipped the policy divergence story that dominated last year.
Given this new landscape, derivative traders should adjust their view on GBP/USD from bearish to neutral or cautiously bullish. The period of expecting sterling weakness due to aggressive BoE easing is likely over for now. This suggests strategies that benefit from range-bound price action or a gradual appreciation in the pound are now more appropriate.
We should consider buying GBP/USD call options with expirations in the second quarter of 2026 to position for a potential grind higher. Strike prices around the 1.3850 level could offer a favorable risk-to-reward profile, targeting a retest of the highs seen in early 2025. This strategy limits downside risk while capturing potential upside if the pound strengthens on the shifting central bank dynamics.
Volatility should also be a key consideration in structuring trades over the coming weeks. Implied volatility for GBP/USD has fallen to a 12-month low of 6.8%, making long-option strategies cheaper than they were throughout much of last year. Therefore, now is a more cost-effective time to establish positions that profit from a potential increase in price.
