BoE MPC member Megan Greene said on Monday that second-round effects from the energy price shock may not appear for another year. She also referred to inventories as one factor behind global economic resilience to the Iran war.
Greene said negative supply shocks should not be looked through. Following these comments, GBP/USD rose 0.23% on the day and traded at 1.3353 at the time reported.
Second Round Effects Coming Through
Looking back at comments from 2025, the warning that second-round effects from the energy price shock would take a year to appear is now critical. The global economy’s initial resilience following the Iran war was supported by inventories, but those buffers have since diminished. We must not ignore the lingering impact of those negative supply shocks.
The predicted inflationary effects are now visible in the most recent data. UK Core CPI has remained stubbornly above 3.5% in the first quarter of 2026, and April’s wage growth figures came in at a surprisingly strong 5.2%. This suggests the energy price spike from last year is now firmly embedded in domestic price-setting behaviour.
This persistent inflation forces the Bank of England to maintain a hawkish stance, pushing back against market expectations for interest rate cuts later this year. The market may be underpricing the risk that UK rates will remain elevated for longer than those in the US or Eurozone. Therefore, traders should consider positioning for a steeper UK yield curve through SONIA futures, betting that near-term rate cut expectations will be reversed.
For currency markets, this policy divergence makes the pound look attractive. With GBP/USD currently trading near 1.2850, buying call options on the pair offers a way to profit from a potential sterling rally while limiting downside risk. A hawkish BoE, contrary to a potentially more dovish Federal Reserve, creates a strong case for sterling strength in the coming months.
We must remember the core point from last year that we should not look through these supply-side issues. The historical parallel is the 1970s, where initial energy shocks led to a protracted period of inflation that policymakers initially underestimated. This suggests that the current inflationary pressures could be more durable than many are currently anticipating.
