Today’s UK CPI data shows differing expectations among market participants. The consensus for the Headline Year-on-Year CPI is 3.7%, with predictions ranging from 3.5% to 3.9%, leaning towards the higher end. For the Core Year-on-Year CPI, the consensus is also 3.7%, with estimates between 3.4% and 3.9%. The Services Year-on-Year CPI has a consensus of 4.8%, with forecasts ranging from 4.7% to 5.0%, also indicating a tendency towards a higher figure.

Expectations On Forecast Extremes

Analysts are particularly interested in any figures that exceed the forecast extremes. There’s a 94% chance that interest rates will remain steady in September, with a 78% chance for October. By the end of the year, markets expect only a slight easing of 13 basis points. A significant surprise in CPI figures might change these expectations, potentially removing the possibility of further rate cuts. On the other hand, a large miss could shift market sentiment towards an October rate cut, but this would require a substantial deviation. With the market closely watching today’s inflation data, the consensus for headline CPI stands firmly at 3.7%. A result above 3.9% would surprise many and likely lead to a more hawkish outlook from the Bank of England. This is particularly relevant, given the stubborn inflation observed throughout the first half of 2025.

Market Reactions And Strategies

We are particularly concerned about the services CPI, currently set at a consensus of 4.8%. This persistent inflation is linked to strong wage growth, which was reported at an annualized rate of 5.4% last month. A high services figure today could confirm that underlying price pressures are not easing as quickly as the Bank would hope. This ongoing pressure explains the market’s 94% expectation of a rate hold at the September meeting. In August, Bank of England officials stated that they needed more convincing evidence of falling inflation before starting to cut rates again, after their cycle began in late 2024. With Q2 GDP growth for 2025 at only 0.2%, the Bank faces challenges. Thus, if the headline CPI exceeds 3.9%, we should explore derivatives that benefit from higher short-term interest rates. This could mean selling short-sterling futures or buying put options on them, as the market would likely reassess the 13 basis points of easing priced in for the rest of the year. Such a move would probably strengthen the pound, making call options on GBP/USD in the near term an appealing strategy. Conversely, if headline inflation drops below the 3.5% minimum expectation, it could revive hopes for an October rate cut. In this case, we would anticipate a sharp decline in short-term bond yields. Traders should be prepared to buy call options on short-term UK gilts to profit from any price increases. Given the narrow forecast range, implied volatility in the options market is high today. Any movement outside the 3.5% to 3.9% range will likely cause a significant shift in the pound and short-term rates. This suggests that even traders without a specific directional view could benefit from volatility-based strategies in the upcoming days. Create your live VT Markets account and start trading now.

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