Uk Pmi Signals Softer Growth
The Services PMI dropped to 51.2 from 53.9, missing the 53.0 estimate. The Manufacturing PMI eased to 51.4 from 51.7, above the 51.1 forecast. The Bank of England kept its rate unchanged at 3.75% last week and warned the Middle East conflict could lift inflation via higher energy costs. Markets are now fully pricing in two rate rises by year-end, reversing earlier expectations for easing. In Japan, the National CPI rose 1.3% year on year in February, down from 1.5%, while core inflation excluding fresh food slowed to 1.6% from 2.0%, below the 2% target. The Bank of Japan held its policy rate at 0.75% last week and said it will keep raising rates if conditions match its forecasts. Focus next is on BoJ meeting minutes and UK CPI and PPI data due Wednesday.Key Risks And Next Data Catalysts
Looking back at the data from March 2025, we saw a clear warning sign for the UK economy. The sharp drop in the PMI figures, particularly in the services sector, was an early signal of the economic slowdown that followed later that year. The market’s reaction then was to price in Bank of England rate hikes to fight inflation, which proved to be a difficult balancing act. Now, in March 2026, those stagflationary fears have become a reality, with UK GDP growth for the last quarter of 2025 coming in at just 0.1% while inflation remains sticky at 3.4%. This contrasts sharply with the situation in 2025, as the Bank of England now has far less room to raise rates further without tipping the economy into a recession. The market is currently pricing in a 50% chance of a rate cut by the end of this year. Meanwhile, Japan’s economic picture has shifted significantly from a year ago. Whereas core inflation dipped below target in early 2025, the latest data for February 2026 shows it holding firm at 2.6%, driven by sustained wage growth. This gives the Bank of Japan a much clearer mandate to continue its policy normalization, putting upward pressure on the yen. This growing divergence between a slowing UK and a cautiously tightening Japan suggests we should be positioned for further downside in the GBP/JPY pair. We see value in buying put options on GBP/JPY with expirations in the next three to six months to capitalize on this expected trend. The lesson from 2025 is that weak activity data eventually outweighs inflation-driven rate hike expectations. We should also closely monitor UK interest rate futures for signs that the market is beginning to more aggressively price in rate cuts. Any acceleration in that trend would be a strong signal to increase bearish positions on the pound. The rapid shift in expectations we witnessed in 2025 shows how quickly sentiment can turn once the narrative of economic weakness takes hold. Create your live VT Markets account and start trading now.
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