GBP/USD fell about 0.35% on Tuesday to around 1.3350, dropping below the 200-day exponential moving average (EMA) for the first time since early December. It has retreated from a late-January high near 1.3870 by over 500 pips. The Bank of England held rates at 3.75% in February by a 5-4 vote, with Andrew Bailey casting the deciding vote. Bailey told Parliament the March 19 decision is “a genuinely open question”, while services inflation was 4.4% in January.

Market Reaction And Rate Expectations

Middle East conflict and higher oil prices have led markets to reduce expectations of a March rate cut, due to inflation risks. UK government bond yields rose sharply on Monday as rate expectations shifted. Labour lost the Gorton and Denton by-election, raising questions about Prime Minister Starmer’s leadership and Chancellor Reeves’s fiscal plans. This added pressure to Sterling. In the US, the Federal Reserve held rates at 3.50% to 3.75% in January, and minutes showed some participants discussed raising rates if inflation stays above target. The Dollar strengthened as a safe-haven during the Iran crisis. Technically, GBP/USD trades near 1.3355, below the 50-day EMA around 1.3510 and testing the 200-day EMA near 1.3375. Resistance sits at 1.3400–1.3425 and 1.3510, while support is near 1.3300 and 1.3200. We remember this time last year when concerns over political instability and Middle East conflict pushed GBP/USD below its key averages. The drop toward 1.3350 was a pivotal moment, as markets began to realize the Bank of England’s inflation fight was far from over. That period of indecision ultimately resolved to the downside, setting a bearish tone that has largely persisted.

Outlook For Sterling And Volatility

Those fears about sticky services inflation proved correct, as the 4.4% figure from early 2025 continued to climb before peaking late last year. This forced the Bank of England to abandon any thought of cuts, ultimately hiking rates twice more to the current 5.0% level. We now see that the narrow 5-4 vote to hold rates at 3.75% was a critical turning point for the pound. Given this history, the pair’s subsequent slide to the current trading range around 1.2750 is logical. With the BoE likely to hold rates firm for the foreseeable future, selling rallies remains a sound strategy for the weeks ahead. We would consider selling out-of-the-money call options or establishing bear call spreads if the price attempts to rebound toward the 1.2900 resistance level. Looking forward, implied volatility is likely to pick up ahead of the UK inflation data due in two weeks. Current market data from the Office for National Statistics shows wage growth is still running at a stubborn 5.8%, a key metric the BoE is watching. Traders could look at buying puts to protect against a sharp move down if that wage data comes in higher than expected. The geopolitical factors that drove the dollar’s safe-haven appeal last year have evolved but not vanished, with Brent crude prices holding steady above $85 per barrel. On the other side of the pair, the Federal Reserve is signaling it will be patient before cutting its own rates, providing a solid floor for the US dollar. This backdrop continues to create headwinds for any significant or sustained sterling recovery. Create your live VT Markets account and start trading now.

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