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The Pound Sterling (GBP) took another step lower amid a cautious stance against the US Dollar (USD) on Monday, easing back from recent multi-year highs as investors positioned ahead of a busy week of UK data and the Bank of England's (BoE) first policy decision of 2026. GBP/USD slipped to 1.3646, pulling back from the August 2021 high of 1.3847 reached on January 27, as a firmer Greenback and pre-BoE positioning weighed on Cable.

The BoE is widely expected to hold its Bank Rate unchanged at 3.75% when it announces its decision on Thursday. Markets see only a 4% chance of a rate cut at the February meeting, with the first reduction now priced for April at the earliest. The Monetary Policy Committee (MPC) remains divided on the pace of further easing, with December's decision to cut rates a 5-4 split. Governor Andrew Bailey noted that future cuts would become "a closer call" as the Bank Rate approaches neutral levels estimated at 3%-3.5%.

UK inflation data released in January showed that the Consumer Price Index (CPI) for December rose to 3.4% year-on-year, above expectations and complicating the outlook for further rate cuts. Services inflation remains elevated, and while wage growth is moderating, it continues to run above levels consistent with the BoE's 2% inflation target. MPC member Megan Greene cautioned last week that the Bank may not be able to lower rates as much as expected this year.

Tuesday's economic data docket remains limited, forcing Cable traders to wait for Wednesday to bring the final UK Services Purchasing Managers' Index (PMI) for January, with flash data showing business activity at a 21-month high. These releases will be closely watched for signs of whether the UK economy's resilient start to 2026 can be sustained amid global uncertainty.

The US Dollar Index (DXY) steadied above 97.00 on Monday following President Donald Trump's nomination of Kevin Warsh as the next Federal Reserve (Fed) Chairman on Friday. Markets view Warsh as a credible, institutionalist pick who would maintain Fed independence, triggering risk-off flows that supported the Greenback. The partial US government shutdown, now in its third day, added to market caution, with the Bureau of Labor Statistics (BLS) confirming that Friday's Nonfarm Payrolls release has been suspended.

Looking ahead, Sterling traders will focus on Thursday's BoE decision and accompanying Monetary Policy Report for updated guidance on the path of rates. While the Bank is expected to hold steady, any shift in the MPC's tone or updated inflation forecasts could drive GBP volatility. The accompanying quarterly projections will be scrutinized for signs of whether policymakers see scope for faster easing later in the year.

Pound Sterling price forecast

GBP/USD has pulled back from its recent test of the August 2021 high near 1.3847, with the pair now consolidating around the 1.3650 region. The retreat comes after a strong January rally that saw Cable gain over 2% against the Greenback, driven by broad USD weakness and resilient UK data. The 20-day Exponential Moving Average (EMA) has stalled around 1.3680, with price now testing this dynamic support.

The Relative Strength Index (RSI) sits near 52, reflecting balanced momentum after the recent pullback from overbought conditions. Measured from the 1.3780 high to the 1.3006 low, the 50% Fibonacci retracement at 1.3393 acts as key support, while the 61.8% retracement at 1.3485 provides an intermediate floor. A close below the latter would signal the recent bullish trend is fading.

Near-term resistance is seen at the 1.3700 psychological level, backed by the January high at 1.3847. Bulls would need a sustained break above this region to open the path toward the 1.4000 handle. On the downside, initial support sits at the 20-day EMA near 1.3680, followed by 1.3485. Thursday's BoE decision could be the catalyst for the next directional move, with any hawkish surprise potentially reigniting Sterling demand.

GBP/USD daily chart

(Click on image to enlarge)

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