Following the cooling of the UK economy and labor market, there was news of a slowdown in inflation. The Bank of England’s interest rates are now expected to fall sooner rather than later. However, this is not the only challenge for the GBP/USD pair. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The UK labor market is falling to 2021 levels.
- Inflation slows to a 10-month low.
- The Bank of England may cut rates more than twice.
- Short trades on the GBP/USD pair can be opened with the target at 1.3390.
Weekly Fundamental Forecast for Pound Sterling
The optimism surrounding the British budget has allowed the pound to strengthen against major global currencies for the first time since November. The rally has been fueled by the fastest-growing economy in the G7 after the US and the Bank of England’s reluctance to cut rates amid high inflation. Back in January, investors surveyed by Bank of America considered the GBP/USD pair, which was at a 4.5-year high, to be fairly valued. However, in February, the situation changed dramatically.
The domino principle. Once one bone falls, the whole structure collapses. In 2025, UK GDP expanded by 1.4%, faster than most of the world’s major economies. However, in the second half of the year, gross domestic product slowed significantly, and the Bank of England lowered its forecast for 2026 from 1.2% to 0.9%. The release of GDP data for the fourth quarter sounded the death knell for the GBP/USD pair.
UK GDP
Source: Bloomberg.
Furthermore, UK unemployment rose to 5.2% in October–December, while wage growth fell to 3.4%, with both figures hitting five-year lows. Adding to the weakness of the labor market was a slowdown in consumer prices in January to 3%, the lowest level in 10 months. This wave of negative news convinced investors that the repo rate would be cut sooner rather than later.
UK Inflation
Source: Bloomberg.
The futures market has raised the chances of monetary policy easing in March from 70% to 80%. By April, there is complete certainty. The probability of two acts of monetary expansion in 2026 has also jumped to almost 100%. At the same time, markets believe that these measures may not be enough. Further deterioration in UK macroeconomic data could push the repo rate down to 3%.
However, the pound’s troubles do not end there. A series of unsuccessful political appointments, tax increases, and a cooling labor market and crippling economy have dragged Keir Starmer’s political rating down below rock bottom. He is the most unpopular British prime minister in history. Rumors of his resignation are circulating on Forex, and political instability is pushing GBP/USD quotes even lower.
In February, a net 7% of Bank of America investor respondents considered the pound to be overvalued. This is despite its 2.7% decline from January’s highs. Political turmoil, weak economic data, and the Bank of England’s intention to cut rates amid the Fed’s pause are an explosive mix that could ruin any currency.
Weekly Trading Plan for GBP/USD
Against this backdrop, short positions on the GBP/USD pair formed at 1.363 and 1.36 appear to be a sound decision. The pair has already reached the first of the two previously announced targets, 1.35, and is approaching the second, 1.342. How low can the pound fall? The levels of 1.339 and 1.325 are looming on the horizon. Therefore, it is likely that the focus will remain on selling the pound.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
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