The pound fell in thin trading on Monday as US markets were closed for President’s Day. GBP/USD was 1.3635, down 0.12% during the North American session.
Markets were mixed after last week’s US inflation data showed cooling prices, which increased expectations of further Federal Reserve rate cuts. With few scheduled releases in the US and UK, attention is on UK labour market figures on Tuesday and CPI on Wednesday.
Uk Inflation Outlook
UK CPI is forecast at -0.5% month-on-month and 3% year-on-year in January, below December’s reading. Any renewed easing in inflation could increase expectations of Bank of England rate reductions.
A Reuters poll found that more than 60% of economists (41 of 63) expected the BoE to cut rates by 25 basis points to 3.50% at the 19 March meeting, based on a 10–16 February survey. UK political tensions also eased after Labour backed Prime Minister Keir Starmer following debate over appointing Peter Mandelson as ambassador to the US.
In the US, upcoming events include Fed speeches, durable goods orders, housing data, and the FOMC meeting minutes. On technicals, GBP/USD was near 1.3633, with support indicated around 1.3518 and 1.3506, and a trend line from 1.3035.
Looking back a year ago, in mid-February 2025, we saw the market positioning for a Bank of England (BoE) rate cut. The expectation at the time was for January 2025 inflation to fall to 3%, with over 60% of economists polled predicting a rate cut in the subsequent March meeting. The GBP/USD was trading firmly above 1.3600 on this sentiment.
However, the data that followed proved those expectations wrong, serving as a valuable lesson. UK inflation in January 2025 actually printed at a stickier 3.2%, causing the BoE to hold rates at 3.75% in March 2025 and pushing the Pound lower. This historical pivot shows how a single inflation report can completely alter the central bank’s path and market direction.
Current Market Setup
Fast forward to today, the landscape is very different. The latest UK inflation data for January 2026 came in at 2.1%, much closer to the BoE’s 2% target, and the central bank has since cut rates to the current 2.75%. Recent GDP figures for the last quarter of 2025 also showed sluggish growth of just 0.1%, increasing pressure for more stimulus.
With inflation now largely under control and economic growth stagnant, we believe the BoE is poised for another rate cut in the coming months. This outlook puts downward pressure on the Sterling, with GBP/USD currently trading near 1.2950. Derivative traders should consider strategies that benefit from a potential decline in the pair.
Buying GBP/USD put options with a strike price around 1.2800 and an expiry in late March could be a prudent approach. This allows traders to profit from a move lower while clearly defining their maximum risk to the premium paid. The position directly capitalizes on the growing divergence between a dovish BoE and a more patient Federal Reserve.
Traders should also monitor implied volatility, which is likely to rise ahead of the next BoE meeting announcement. If volatility seems too expensive, a bear put spread could be a more cost-effective strategy to express this directional view. This involves buying a higher-strike put and selling a lower-strike put to reduce the net premium spent.
