Rising Input Costs
Fuel, energy and other input costs are rising, which may lift inflation again. Pump prices rose by nearly 7% in March and are expected to rise by a similar amount in April. Dual fuel bills in July are expected to rise by near 30%. Fertiliser prices are rising, and shipping costs are surging, which may feed into other parts of the CPI basket. Deutsche Bank expects CPI to return to 3% and peak near 3.5% year-on-year later this year, with the exception of Q2 2026. It says this path reduces the scope for Bank of England rate cuts in 2024 and raises the risk of further tightening. The latest UK inflation data shows that price pressures remain persistent, challenging the disinflation narrative. Core inflation has proven particularly sticky, driven higher by strong price growth in the services sector. This mirrors a pattern we saw in 2024, suggesting the final mile of getting inflation down will be the hardest.Rates Higher For Longer
Looking ahead, we are facing another difficult turn as energy costs are rising sharply. With Brent crude oil recently climbing above $95 a barrel, pump prices are set to increase, and wholesale natural gas futures are up nearly 20% this month. This surge in energy threatens to push headline inflation back towards 3% later this year. This evolving situation should put to rest any expectations for imminent Bank of England rate cuts. Markets are already adjusting, with pricing based on SONIA futures now indicating that a rate cut in the first half of the year is almost completely off the table. Traders should position for a higher-for-longer interest rate environment, meaning bets on falling rates are now very risky. In the coming weeks, a key strategy will be to use interest rate options to protect against, or profit from, rates remaining elevated. For instance, buying SONIA futures puts or selling calls can be an effective way to position for the Bank of England maintaining its restrictive stance through the summer. This hawkish repricing should also provide support for the pound sterling. Therefore, traders should be cautious about holding short sterling positions in the foreign exchange markets. The prospect of the UK maintaining higher interest rates than its peers, like the European Central Bank, could drive capital flows into the pound. Positioning for sterling strength against the euro, through spot or options contracts, could be a logical response to this divergence. Create your live VT Markets account and start trading now.
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