GBP/USD Stalls Near 1.35 Despite Retail and PMI Upside Surprise
The British pound failed to mount a sustained rally as investors remained focused on the prospect of further monetary easing from the Bank of England.
A batch of stronger-than-expected UK economic data failed to support a significant rebound on GBP/USD. Although several key indicators pointed to improving growth momentum, expectations of an imminent rate cut by the Bank of England continued to weigh on GBP/USD, limiting the pair's upside from rising beyond the 1.3500 treshold.
On the data front, UK retail sales in January 2026 surged 1.8% month-on-month (m/m), far exceeding the previous month's achievement of 0.4%, and surpassing consensus expectations that only predicted a 0.2% increase.
Additionally, the preliminary report of the purchasing managers' index (PMI) released by S&P Global indicates continued expansion in the manufacturing and services sectors at the beginning of February 2026. The composite PMI index rose slightly from 53.7 to 53.9, better than market projections that anticipated a decline to 53.3.
Taken together, the data suggest firmer growth momentum at the beginning of the year. Nevertheless, investors remain convinced that the Bank of England will proceed with another rate cut at its meeting next month.
This cautious stance is not unrelated to the weakening in the labor sector. Labor data released earlier this week showed the unemployment rate rose from 5.1% to 5.2% in December 2025. The number of unemployment claims also surged significantly from 2,700 to 28,600 in January 2026.
Within the PMI report, the employment sub-index was the only major component to decline. UK companies appear to be boosting productivity while trimming operating costs, particularly labor expenses. The adjustment has been linked to government measures that raised employee taxes and increased the minimum wage threshold.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated that companies are still focused on cost efficiency. This strategy extends the wave of layoffs that has been ongoing since the announcement of the Autumn Budget 2024.
Money markets are currently pricing in nearly an 80% probability of a 25-basis-point rate cut at the BoE's March meeting. Investors also anticipate an additional reduction in the second half of the year.
These expectations for further monetary easing continue to constrain sterling's upside, even as economic data show pockets of resilience.
Dominic Bunning, Head of G10 Currency Strategy at Nomura, assesses that the weakening labor market, rising unemployment, and the clear trend of slowing wage growth are indications that the BoE is likely to continue its easing cycle in the coming months.