TD Securities expects UK headline inflation to slow to 3.1% year-on-year in January, down from 3.4% in December. It sees core inflation at 3.2% year-on-year, unchanged.
The firm says headline inflation should fall mainly because of base effects in food and energy. It expects services inflation around 4.4% year-on-year, and core goods inflation at 1.0% year-on-year.
Uk Labour Market Stabilisation
TD Securities expects the unemployment rate to stay at 5.1%. It notes this is the highest level since 2021, but recent employment data suggests the labour market is starting to stabilise.
The firm expects wage growth to slow across measures. It sees private sector pay growth easing toward 3.25%.
January 2026 inflation data showed headline CPI falling to 2.9%, which broadly confirms the cooling trend we expected last year. However, core inflation stayed firm at 3.3% because services inflation remains high. This split is keeping the Bank of England cautious, as shown in its recent comments.
Because core inflation is still sticky, interest rate markets have pushed back the first BoE rate cut. Markets now price the first cut for August, not May. We should consider selling short-dated SONIA futures, especially the June and September 2026 contracts, to position for rates staying higher for longer. This trade benefits if the BoE keeps policy unchanged through the first half of the year.
Sterling Range Trading
For sterling, this creates a mixed outlook and should limit big one-way moves. That could keep GBP/USD trading in a range. Selling volatility may be the best approach, using an iron condor or a simple strangle on GBP/USD options. One-month implied volatility has already fallen from above 9% in late 2025 to around 7.8%, and we expect it to edge lower.
The labour market story supports this view. The latest ONS data shows unemployment has held near 5.0% for two straight quarters. This reduces the pressure on the BoE to cut rates quickly, similar to the policy pause seen in 2019. That supports the case for range-bound FX moves and steady short-term rates.
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