UK headline CPI rose 3.0% year-on-year in January, down from 3.4% in December, in figures from the Office for National Statistics. The result matched the market forecast and remained above the Bank of England’s 2% target.
Core CPI rose 3.1% year-on-year, compared with 3.2% in December, and was in line with expectations. Monthly CPI was -0.5% in January, following 0.4% in December, also matching the consensus.
Gbp Reaction And Boe Outlook
After the release, GBP/USD was 0.01% higher at 1.3562, after trading around 1.3556 earlier. The Bank of England has said price pressures are expected to ease to around 3% in Q1 2026 and closer to 2% in Q2.
Technical levels cited included a 20-period EMA at 1.3593 and a 14-day RSI at 39. Other reference points were 1.3500, 1.3400, and a “Symmetrical Triangle” or “Volatility Contraction Pattern”.
The Bank of England’s inflation target is 2% and it adjusts base lending rates to guide monetary conditions. It can also use quantitative easing or quantitative tightening, which can affect the Pound.
The latest inflation figures for January came in exactly as we expected at 3.0%. This shows a cooling from the 3.4% we saw in December 2025, but it does little to change the overall picture for the Pound. Since there was no surprise, the currency barely moved, staying weak around the 1.3560 level against the dollar.
Growth Risks And Rate Cut Debate
This puts the Bank of England in a difficult position, as inflation is still a full percentage point above its 2% target. However, with the economy showing clear signs of slowing, the pressure to cut rates will build throughout the coming year. We saw this in last week’s data, which showed that the UK economy entered a technical recession in the second half of 2025, with GDP falling by 0.1% in Q3 and 0.3% in Q4.
Adding to the weak outlook, recent ONS statistics confirmed that retail sales volumes fell sharply by 3.2% in January 2026, the biggest drop in over a year. This weakness in consumer spending reinforces our view that the Bank will prioritize growth over fighting this last bit of inflation. Therefore, rate hikes are off the table, and the conversation is shifting toward the timing of the first rate cut.
For traders, this reinforces a bearish stance on the Pound in the weeks ahead. Looking back at 2025, the market was focused on how high rates would go to tame inflation. Now, the focus is squarely on how a slowing economy will force the Bank of England to ease its policy later this year.
The current environment of declining inflation, but with economic stagnation, suggests that volatility may increase. We believe using options is a prudent way to express a bearish view on the GBP/USD pair. Buying put options allows for profiting from a fall in the currency while strictly defining the maximum potential loss.
Technically, the GBP/USD pair remains in a downtrend, trading below its key moving averages. A break below the recent low of 1.3500 would signal a continuation of this move. We see the next significant target for sellers at the 1.3400 level.
