Sterling fell against major currencies on Thursday after weaker UK data. GBP/USD still held above 1.3600 and rose to about 1.3640, keeping a mild upward move from last week’s lows.
Preliminary UK GDP showed growth of 0.1% in Q4 2025 and 1% year on year. Forecasts were 0.2% quarterly and 1.2% yearly, while Q3 GDP was revised to 1.2% from 1.3%.
Uk Output Weakness Weighs On Sterling
Manufacturing and services output dragged on Q4 activity. Manufacturing production fell 0.5% in December after a 1.9% rise in November, revised from 2.1%, and services output was flat in Q4 versus a 0.2% increase expected.
Markets now price in further Bank of England borrowing cost cuts to support growth. This may limit demand for the pound.
In the US, nonfarm payrolls beat expectations, reducing bets on near-term Federal Reserve rate cuts. January’s jobs concentration and a sharp revision to 2025 employment growth have limited the US dollar’s rebound.
Given the disappointing UK economic data, we see the pound’s recent stability above 1.3600 as a selling opportunity. The weak 0.1% GDP growth for the fourth quarter of 2025, combined with contracting manufacturing, strongly suggests the Bank of England will need to cut interest rates. This expectation of lower borrowing costs should cap any significant sterling strength in the near term.
Policy Divergence Favours The Dollar
The contrast with the US is becoming sharper, as the recent strong Nonfarm Payrolls report gives the Federal Reserve justification to hold its own rates steady. This policy divergence, where the UK is leaning towards easing while the US remains on hold, is a classic bearish signal for the GBP/USD pair. We should therefore anticipate further downside pressure on the pound as this narrative solidifies.
We’ve seen the UK’s headline CPI fall to 2.8% in January, a significant drop from the 4.5% rate we were looking at in mid-2025, giving the BoE more room to act. Conversely, US core PCE, the Fed’s preferred inflation gauge, has remained stubbornly above 3.0%, limiting any immediate prospect of American rate cuts. This widening gap in inflation trends further supports our view of a weaker pound.
In the coming weeks, we should consider buying put options on GBP/USD with strike prices below 1.3500 to position for a decline. This strategy defines our risk while providing exposure to a potential move towards the 1.3400 support level seen late last year. Alternatively, shorting GBP/USD futures contracts around the current 1.3640 level presents a more direct way to trade this expectation.
Historically, when UK quarterly growth has stalled like this, the currency has typically underperformed for the following one to two months. Recent Commitment of Traders reports have also shown a steady build-up in net short positions against the pound, indicating that larger market participants share this bearish view. We can expect implied volatility to rise, so establishing positions before the market fully prices in a BoE rate cut could be advantageous.
