Pound Sterling (GBP) weakened sharply against the US Dollar (USD) after softer-than-expected inflation reinforced expectations of a Bank of England (BoE) rate cut and a more dovish policy path into 2026, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

BoE rate cut expectations weigh on GBP

"The pound is weak, down 0.7% vs. the USD and underperforming all of the G10 currencies on the back of a softer than expected CPI release with headline and core both coming in at 3.2% y/y."

"The BoE is expected to deliver a 25bpt cut at tomorrow’s meeting, and this latest inflation report is weighing on the market’s expectations for the policy trajectory in 2026. Yield spreads have narrowed, eroding an important source of the pound’s recent support."

"Sentiment remains a dominant driver however, and risk reversals have faded a good portion of the premium for protection against downside risk for GBP/USD."