Inflation Expectations

Recent meeting minutes show that inflation has decreased and is predicted to continue towards the 2% target. Future monetary easing will depend on the inflation forecast. At the same time, the European Central Bank is likely to keep its interest rate at 2%. Analysts are watching growth forecasts for hints of potential rate hikes expected in 2026. The Bank of England holds eight meetings each year, where interest rate changes can impact the Pound Sterling. The Monetary Policy Committee, made up of nine members, collectively decides on the interest rate to meet the UK’s inflation goal. When the Bank of England lowered its rate to 3.75%, the Pound strengthened due to the controversial nature of the decision. With four out of nine members voting to keep the rate the same, this could be seen as a “hawkish cut.” It suggests the easing cycle may be shorter than expected. The disagreement within the committee is an important signal for us moving forward.

Market Opportunities

We need to keep an eye on UK inflation. Recent data from the Office for National Statistics shows that November’s CPI was 2.8%, still above the 2% target. This is notably different from the Eurozone, where Eurostat reported Q3 GDP growth at just 0.1%. The ECB is holding its rate at 2.00%, increasing the yield difference in favor of the Pound Sterling. This uncertainty creates opportunities in the options market. Implied volatility for one-month EUR/GBP options has risen to over 8.5% after the announcement. We should consider buying put options on EUR/GBP to take advantage of potential Sterling strength, especially if upcoming UK data is strong. This strategy offers defined risk while anticipating the pair dropping towards the 0.8700 level. We’ve seen similar trends in the past, such as in the late 2010s when a split central bank decision led to unexpected currency strength. In the coming weeks, all inflation and employment data from the UK will be closely examined for insights into the BoE’s next steps in early 2026. Additionally, the remarks from ECB officials will be crucial to monitor for any shifts in their dovish approach. Create your live VT Markets account and start trading now.

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