The UK Consumer Price Index (CPI) for December is about to be released, and it’s expected to rise to 3.3%, up from 3.2% in November. Core inflation is likely to stay above 3.0%, indicating ongoing inflation concerns. The Bank of England (BoE) uses CPI as an important measure of inflation when setting monetary policy. The BoE’s Monetary Policy Committee (MPC) will meet soon, and this inflation data could impact their decision to maintain the bank rate at 3.75%.

December Rate Decision

In December, the MPC decided to lower the bank rate by 25 basis points, despite worries about inflation. The new data will be crucial for future monetary policy choices regarding interest rates and the value of the Pound Sterling. The BoE’s job is to manage inflation through interest rate changes, which also affect the Pound’s value. If inflation rises, interest rates might go up, attracting foreign investments to the UK. The BoE uses tools like quantitative easing and tightening to affect the economy and the currency’s strength. Traders are eagerly awaiting the CPI report, as it could lead to changes in monetary policy. We’re keeping an eye on this Wednesday’s inflation figures, with overall CPI expected to rise to 3.3%. This would be the first annual increase since inflation started to decline in 2025. This could complicate matters for the Bank of England. A big difference from this prediction could create volatility in the Pound.

Interest Rate Strategy

The Bank of England reduced rates four times in 2025, but steady wage growth in the mid-4% range is limiting further cuts. Currently, the market expects just over 42 basis points of additional cuts for the rest of the year, leaving little room for surprises. Any rise in inflation data could have a strong effect. Given the uncertainty regarding how the data might affect the February 5th rate decision, there’s an opportunity to buy volatility. A long straddle or strangle on GBP/USD, using options that expire shortly after the BoE meeting, could be a smart way to prepare for potential price swings. This strategy benefits from significant moves in either direction. If inflation is higher than expected, the market could quickly reduce the anticipated easing for this year. In that case, GBP/USD might reach its year-to-date ceiling around 1.3567. Traders might want to consider call options with strike prices above 1.3500 to take advantage of this possibility. On the other hand, if the inflation report is weaker than anticipated, it would support the easing approach the BoE took last year when it cut rates by a full percentage point. This could lead the Pound to break its current support near 1.3340 and target the December 2025 low of 1.3179. Put options with strikes around 1.3300 could offer effective protection if this happens. Create your live VT Markets account and start trading now.

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