The Eurozone and the UK are releasing Consumer Price Index (CPI) figures today. The Eurozone report provides the final estimate for August, showing core annual inflation at 2.3% and services inflation at 3.1%. This final estimate usually doesn’t impact the market much as it is expected to back up the current policy of the European Central Bank. In contrast, the UK CPI report for August is drawing more attention. Headline annual inflation is predicted to stay at 3.8%, similar to July, while core annual inflation is expected to dip slightly to 3.6% from 3.8%. Analysts believe that food price increases in the UK will continue, likely reaching their peak in September, which will keep the overall inflation estimate high.

Forecasts For UK Inflation

UK inflation forecasts vary. Some predict core annual inflation will be 3.5%, while others think it may rise to 3.7% or even 4.0%. Barclays, Nomura, and Deutsche expect the core annual inflation rate to be 3.6%. Regardless of these differing opinions, today’s report likely won’t change the Bank of England’s decision on Thursday. As the UK’s August inflation report is released, we are focusing on the core figure, which is anticipated to fall slightly to 3.6%. While the Eurozone data is only a final update, UK numbers will influence the week ahead. The critical aspect will be whether services inflation shows any signs of easing. Ongoing price pressures support the “higher for longer” interest rate approach from the Bank of England. Looking back, 2023 and 2024 showed that persistent inflation forced central banks to maintain tight policies. A reading near 3.8% would indicate that the battle against inflation is ongoing, which means UK interest rates, reflected in SONIA futures, are likely to remain steady for the rest of the year.

Market Expectations And Volatility

The wide range of analyst predictions, with some estimating core inflation as low as 3.5% and others as high as 4.0%, suggests considerable uncertainty. This range often leads to increased market volatility, as any surprise figure could result in a rapid reassessment. This is a classic opportunity to consider strategies that could benefit from significant market moves, such as buying options straddles on the FTSE 100 index or on GBP/USD. Implied volatility for these assets will likely rise ahead of the report, reflecting market anticipation. A higher-than-expected number could strengthen the pound and negatively affect stocks, as it would delay expectations for rate cuts. On the other hand, a significantly lower figure might boost stocks and weaken the currency. Even though the Bank of England is not expected to change its policy this Thursday, today’s data will influence the wording of its statement and future guidance. Therefore, it is wise to look at option expiries that go beyond this week’s meeting, allowing us to prepare for changes in the market’s long-term rate expectations based on the new inflation data. Create your live VT Markets account and start trading now.

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