Sterling held weekly gains near 1.3565 against the Dollar in Thursday’s Asian session, as the Dollar stayed under pressure amid uncertainty over US trade policy. The US Dollar Index (DXY) was slightly lower near 97.55.
GBP/USD rose 0.42% on Wednesday and moved back towards 1.3600 after trading between about 1.3450 and 1.3520 for several days. The move followed a pullback from the late-January high near 1.3870 and took price towards the 20-day EMA.
Dollar Pressure And Sterling Levels
UK CPI inflation fell to 3.0% in January from 3.4% in December, according to the ONS, and this was the lowest reading since mid-2025. Markets priced roughly 80% odds of a 25 basis point Bank of England cut at the 19 March meeting, while services inflation was reported at 4.4%.
UK unemployment rose to a five-year high of 5.2%, adding to expectations for easier policy. In the US session on Wednesday, GBP/USD was at 1.3523, up 0.29%, with limited data leaving markets focused on central bank comments and trade policy uncertainty.
Looking back at this time in 2025, we saw the Pound holding near 1.35 against a weak US Dollar. Today, with GBP/USD trading closer to 1.2750, the dynamic has clearly inverted. The Dollar’s weakness was the dominant theme last year, but that has since faded.
The market was convinced the Bank of England would cut rates in March 2025 after inflation fell sharply to 3.0%. However, the Bank’s caution about services inflation proved correct, with the latest January 2026 CPI data showing inflation remains stubbornly high at 3.8%. This persistence makes near-term rate cuts far less likely than they appeared a year ago.
For derivative traders, this means implied volatility on GBP options could be undervalued. The tension between a slowing UK economy and sticky inflation creates a coiled spring for the currency. We should consider strategies like long straddles, which profit from a significant price move in either direction, ahead of the next BoE meeting.
Shifting Rate Divergence
The US Dollar Index (DXY) was struggling near 97.55 back then, but it now sits firmly above 104. This strength is supported by recent data showing US non-farm payrolls in January 2026 again beat expectations, adding 295,000 jobs. The Federal Reserve’s path is now seen as far more hawkish than the Bank of England’s.
Therefore, the narrative has shifted from broad dollar weakness to sterling-specific headwinds. We should be watching for any further signs of economic divergence between the UK and the more resilient US. This environment makes buying GBP/USD put options an attractive hedge or speculative position, as historical moves show the pair can test post-Brexit lows below 1.20 when such divergence strengthens.
