UK inflation rose to 3.8% in July, higher than the expected 3.7%. This unexpected jump supports the Bank of England’s likely decision to pause interest rate changes in September. Financial markets already saw a 94% chance of this pause, so significant changes in investor behavior are not expected. Therefore, there’s little chance for the sterling to rise, with GBP/USD stable at 1.3490 and major option expiries noted at 1.3500.

Services Inflation and Core Inflation

Services inflation held steady at 5.2% annually in July. Meanwhile, core inflation climbed from 4.7% in June to 5.0% in July. These trends signal that the Bank of England faces persistent stagflation concerns. The rise in July’s inflation was mainly driven by transport prices, particularly due to increased airfares during the school summer holidays. This seasonal spike heavily influenced the inflation rate. July’s inflation figure of 3.8% was slightly above expectations and marks a significant jump from 2.1% in May 2025. However, this change does not alter our outlook on the Bank of England’s decision in September, where a pause in rate hikes is almost certain. It suggests that the rate hike cycle that began in late 2021 has likely reached its peak. For derivative traders, this situation limits the pound’s potential for growth in the short term. The concentration of option expiries around the 1.3500 level in GBP/USD is likely to act as a stabilizing force, reducing volatility over the next few weeks. Strategies that profit from range-bound trading, like selling straddles or iron condors, may be suitable.

The Worrying Picture of Stagflation

The details of the situation paint a troubling picture of stagflation. Core services inflation is still high, while recent data shows UK GDP growth for the second quarter of 2025 at a mere 0.1%. This is similar to the weakness seen during the technical recession of late 2023. The combination of persistent inflation and nearly zero growth signals long-term weakness for the sterling once the market moves beyond the immediate central bank decisions. We should take the headline spike from transport prices with caution, as it mainly results from seasonal airfare increases. The key concern remains the enduring core services inflation. This figure will likely prevent the Bank of England from considering rate cuts and will be essential for currency positioning in the last quarter of the year. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now