GBP/USD fell to about 1.3480 in European trade as the Pound weakened. Markets have raised expectations that the Bank of England could cut rates in the near term.
MPC member Alan Taylor said there are downside labour market risks and that inflation is normalising. He said the BoE may deliver two or three rate cuts before reaching a neutral level where policy neither supports nor restrains growth.
BoE Dovish Signals Weigh On Sterling
Recent UK jobs and CPI data showed a higher unemployment rate and slower inflation growth. The US Dollar stayed firm despite fresh tariff threats from US President Donald Trump.
Trump warned of steeper levies on countries that plan to dishonour trade deals. He also referred to options around a tariff policy blocked by the Supreme Court.
GBP/USD was near 1.3470 and the 14-day RSI hovered around 40.00; a close below 40.00 could add to downward momentum. The 20-day EMA is falling and stands at 1.3561.
A close below the 19 February low of 1.3434 could open the way to the 19 January low of 1.3344. A rebound would need a sustained move above the 20-day EMA.
Looking Back To 2025
Looking back to this time in 2025, we saw the Pound Sterling under significant pressure due to expectations of Bank of England rate cuts. The GBP/USD pair was struggling around the 1.3480 level as Monetary Policy Committee members signaled a clear dovish pivot. Those predictions for lower inflation and a softer labor market set the stage for the year that followed.
That dovish stance proved correct, as the Bank of England did indeed cut rates twice by the end of 2025, bringing the Bank Rate down to its current 4.75%. Inflation has cooled significantly, with the latest January 2026 CPI figures showing a rate of just 2.5%, much closer to the target. However, this came at a cost, as the unemployment rate has edged up to 4.3%, confirming the labor market risks mentioned a year ago.
This divergence in policy timing with the US has pushed the GBP/USD down to its current level near 1.2550, a significant drop from last year. For derivative traders, this means the big directional move driven by the initial rate cut cycle may have already happened. With implied volatility now lower, as seen in the Cboe BPVIX which is hovering around 6.5%, selling options to collect premium could be a viable strategy.
Given that both the BoE and the US Federal Reserve are now in a more measured easing phase, we don’t expect the same sharp declines we saw in 2025. This suggests the pair may trade within a more defined range in the coming weeks. Therefore, strategies like selling strangles or straddles could be attractive to capitalize on lower volatility and time decay.
However, we must remain cautious about any upcoming inflation or employment data that deviates from expectations. Any surprising strength in the UK economy could quickly reverse rate cut expectations and cause volatility to spike, making long volatility positions like buying puts a necessary hedge. This would protect against a sudden rebound in the pound.
