Sterling has been one of the stronger G10 currencies in recent weeks, helped by lower expectations for Bank of England easing. From the end of last week, it was the fourth best performing G10 currency and it outperformed the euro. Rabobank now expects the Bank of England to keep rates unchanged for the rest of this year. It previously expected two further rate cuts in March and June.

Market Pricing Shifts

Before the Middle East crisis, markets widely expected a Bank of England rate cut on 19 March, with more easing later in the year. Current pricing implies one further 25 bp rate cut over a six-month horizon, and expectations for a cut this month have fallen sharply. Rabobank links the shift to sticky UK inflation and higher gas prices. It also notes the UK’s sensitivity to energy costs, which could keep CPI above target. The bank says the recent rise in gas prices followed supply concerns linked to the Middle East conflict. It adds that higher energy prices and fewer expected rate cuts could reduce confidence and weaken UK growth prospects. The article was produced using an AI tool and reviewed by an editor.

Implications For Trading Strategy

Looking back at 2025, we saw the Pound perform well as expectations for Bank of England rate cuts diminished significantly. That shift was driven by persistent inflation and a surge in energy prices, which forced a more cautious stance on policy. The market correctly moved away from pricing in multiple rate cuts. That reality has now settled in, with the Bank of England holding its Bank Rate at 5.25% through February of this year. With the latest inflation data for January 2026 showing the CPI rate at 3.8%, it remains stubbornly above the 2% target. This confirms that the fight against inflation is not over, and immediate rate cuts are unlikely. The economic cost of this policy, which we were concerned about last year, is now clear. The UK economy saw almost no growth in the final quarter of 2025, and forecasts for the first half of 2026 remain subdued. This environment of high rates and economic stagnation puts the Pound in a difficult position. Given this conflict between a supportive interest rate and a weak economy, traders should consider using options to manage GBP positions. Buying straddles on currency pairs like GBP/USD allows for a profit from a large price move in either direction. This is a way to trade the building tension without needing to predict whether the high rates or the weak growth will win out first. We should also look at derivatives tied to the UK interest rate curve, such as SONIA futures. While the market has priced in a “higher for longer” scenario, any unexpectedly poor economic data could rapidly shift expectations toward rate cuts later in the year. Positioning for a steeper yield curve could pay off if the BoE is forced to act sooner than currently anticipated. The Pound’s strength against the Euro, a key theme from 2025, may also be nearing its limit. The UK’s specific economic challenges could start to weigh more heavily on the currency. Therefore, buying put options on GBP/EUR could serve as a valuable hedge or a speculative position against the Pound in the coming weeks. Create your live VT Markets account and start trading now.

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