Sterling fell after weak UK Q4 GDP data added to expectations of further Bank of England rate cuts. Markets price a 74% chance of a 25 bps cut to 3.50% at the 19 March meeting, and nearly 50 bps of easing over the next 12 months.
This week’s UK labour and inflation releases are being watched for policy signals and near-term GBP moves. The unemployment rate is expected to stay at 5.1% for a third month in December, while private sector regular pay is forecast at 3.4% year on year, down from 3.7% in November and the lowest since November 2020.
Inflation Data In Focus
Headline CPI is expected to drop to 3.0% year on year from 3.4% in December, linked to lower utility prices. Core CPI is also seen at 3.0% from 3.2%, while services CPI is forecast at 4.3% from 4.5%, the lowest since March 2022.
UK January retail sales and February PMI data, both due on Friday, are expected to provide an update on current economic activity.
The Pound is underperforming after weak UK growth data for the fourth quarter of 2025 has reinforced our view of a slowing economy. Markets are now pricing in an 80% probability of a Bank of England rate cut at the March 20th meeting. This situation mirrors what we saw in early 2025 when similar economic weakness led to increased bets on policy easing.
With crucial labour market and inflation data coming out next week, we should expect volatility to rise. The 1-month implied volatility on GBP/USD options has already ticked up from 6.8% to 7.9% in February, suggesting traders are preparing for bigger price swings. This environment makes option strategies more appealing than taking simple directional bets in the cash market.
Strategy For A Weaker Pound
We believe positioning for a weaker pound through derivatives is the prudent approach. Buying GBP put options or establishing bearish put spreads allows traders to profit from a potential decline while defining their risk. Looking back at the similar setup in 2025, we saw this exact strategy pay off for those who positioned before the central bank confirmed its dovish pivot.
However, traders should remain alert to any surprisingly strong data, especially in the upcoming retail sales and PMI reports. The latest flash PMI survey for February did show a small, unexpected improvement in the services sector. A continuation of positive surprises could force a rapid unwinding of rate cut expectations and send the pound sharply higher.
