Inflation Expectations And Wage Signals
Firms’ 1-year-ahead CPI expectations are projected to rise to 3.9%, lifting the 3mma to 3.3%. The 3-year-ahead CPI expectations measure is projected to rise to 3% on a 3mma basis. Employment growth expectations reached a five-month high in February, and a reversal is anticipated. Hiring plans will be monitored for evidence of that shift. For output, the ONS is expected to confirm Q4-25 GDP growth of 0.1% q-o-q. Any upside risk to the Q4-25 GDP result is expected to be marginal. Business investment is expected to show some improvement versus the reported -2.2% q-o-q outcome. Even so, this is not expected to materially change the overall GDP headline.Market Implications For Uk Rates And Gbp
Looking back to this time in 2025, we were bracing for a very weak Q4-25 GDP print, expecting only 0.1% growth amid concerns over the Iran conflict. The focus was on rising inflation expectations, with firms anticipating CPI to hit 3.9% within a year. This painted a gloomy picture for the UK economy. As of today, March 27, 2026, the inflation narrative has changed dramatically. The latest ONS data shows CPI has actually fallen to 2.1%, far below the levels feared last year and bringing it much closer to the Bank’s target. This reality suggests that derivatives pricing in persistent high inflation, such as inflation swaps, may be misaligned with the current trend. The concerns in 2025 about a reversal in hiring have also not fully materialized. While business investment was weak back then, the UK unemployment rate has remained stable at 4.2% and monthly GDP figures for early 2026 are showing surprising resilience. Traders should therefore be wary of holding overly pessimistic positions on UK assets. With inflation falling faster than expected and growth holding up, the market is now pricing in a higher probability of a Bank of England rate cut by this summer. A year ago, sticky wage forecasts made this seem unlikely, but the disinflationary trend is now the dominant factor. Consequently, positioning for a dovish pivot using SONIA futures could be a primary strategy in the coming weeks. This shift in interest rate expectations will likely impact the pound sterling. The prospect of lower rates relative to other central banks could weigh on the currency. Traders may want to consider using options to position for potential GBP weakness against the US dollar, especially heading into the next Monetary Policy Committee announcements. Create your live VT Markets account and start trading now.
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