GBP/USD traded at 1.3632 on Thursday, recovering after volatility caused by a stronger US dollar following US labour market figures. US employment rose by 130 thousand in January, the biggest increase in over a year, while the unemployment rate fell to 4.3%.
Markets shifted Federal Reserve rate-cut expectations, with a first cut now fully priced for July instead of June. The chance of a move in March is put at less than 5%.
Uk Growth And Rate Cut Bets
The pair rebounded from around 1.3600 after weaker UK data, but showed limited follow-through. UK GDP grew by 0.1% in October-to-December, matching the third quarter and below the Bank of England forecast of 0.2%.
That outcome increased expectations of a 25 basis points rate cut as early as March. Sterling was supported as UK political tensions eased after Prime Minister Keir Starmer received backing from cabinet members and Labour MPs, avoiding an immediate leadership challenge.
An Elliott Wave analysis said a prior view from 14 January, when the pair was at 1.3428, broadly played out but the drop from 27 January to 6 February was larger than expected. It said the move may point to an alternative wave count, though no rules were broken.
The strong US jobs report from January has shifted our view on the Federal Reserve’s timeline for rate cuts. With the CME FedWatch Tool now showing a nearly 80% probability that the first cut will be delayed until July, the dollar is likely to remain firm. This contrasts sharply with the situation just last month, when markets were still holding onto hopes for a spring adjustment.
Policy Divergence And Volatility Trades
On the other side of the Atlantic, the UK’s economic picture is much softer, increasing the likelihood of a Bank of England rate cut. The disappointing 0.1% GDP growth for the fourth quarter of 2025, combined with recent inflation data showing headline CPI falling to 3.8%, strengthens the case for the BoE to act by May. This growing divergence between the Fed’s patient stance and the BoE’s potential dovish turn puts underlying pressure on the GBP/USD pair.
For now, the pair is holding above the key 1.3600 level, partially supported by a temporary easing of political uncertainty in the UK. However, the technical picture is becoming less clear, as the sharp drop between late January and early February suggests the prior bullish trend may be exhausted. This creates an environment of uncertainty where a strong directional move could be triggered by the next major data release.
Given this conflict between fundamental pressures and tentative technical support, trading on volatility seems prudent. Buying straddles or strangles ahead of next week’s US and UK inflation reports could be an effective strategy to capitalize on a potential breakout in either direction. This approach benefits from a sharp price move without needing to predict its specific course.
Traders with existing long positions should consider hedging their risk. Purchasing put options with a strike price just below the 1.3600 psychological support level could provide a valuable safety net. We saw a similar setup in 2024 where policy divergence led to a swift breakdown once a key level failed, and protecting against a repeat of that pattern is wise.
