The British Pound, squeezed between softer inflation and a cautious Bank of England

The British Pound (GBP) is trading in a tug of war between waning inflation, sluggish growth, and shifting expectations around the Bank of England’s (BoE) next moves.

Inflation is drifting lower

The BoE’s November 2025 Monetary Policy Report projects UK inflation easing further over the next year, driven largely by lower contributions from energy bills and base effects.

Recent CPI prints have shown:

• Services inflation edging down,

• Headline inflation softening toward the BoE’s longer-term objectives, though still above target.

This gives investors a credible story that rate cuts are on the table for 2026, even if the BoE is not rushing.

Markets smell eventual easing

Soft inflation data and cautious BoE language have led markets to:

• Price in more dovish expectations for the BoE versus earlier in the year.

• Question how long the UK can maintain relatively high real rates given weak growth and political constraints on further fiscal tightening.

When investors think the central bank will eventually have to ease, the currency tends to feel the pressure.

Structural headwinds still matter

On top of cyclical macro data, the Pound still carries post Brexit baggage:

• Lower potential growth compared with pre Brexit trends.

• A constant need to attract foreign capital to fund current account deficits.

Put together, GBP is stuck between:

• a central bank that can’t cut too early without risking credibility, and

• an economy that can’t absorb high rates forever without further damage.

  
  

For FX traders, that mix makes GBP a currency where data surprises and BoE communication can flip positioning quickly especially versus the USD, where Fed policy and U.S. jobs data dominate the other side of the trade.