UK inflation, measured by the Consumer Price Index (CPI), rose to 3.4% in December, up from 3.2% in November. This was higher than the expected 3.3%. Month-to-month, the CPI grew by 0.4% after a 0.2% drop in November. The Retail Price Index increased by 4.2%, up from 3.8% in the previous month, while the core CPI stayed steady at 3.2% annually.

Producer Price Index Overview

The Producer Price Index – Input rose by 0.8% in the year leading to December, down from 1.1% in November. Despite this new information, the GBP/USD showed little reaction and experienced slight declines. This week, the British Pound performed variably against other major currencies, remaining strongest against the US Dollar. The Bank of England is likely to keep its bank rate stable as inflation continues to influence the value of the British currency and market expectations. Inflation typically impacts currency values, often leading to higher interest rates. The Consumer Price Index measures the cost of goods and services but excludes unstable items like food and fuel. Changes in CPI both year-on-year and month-on-month highlight economic trends and potential actions by the central bank. The recent inflation data from December 2025, slightly higher than expected at 3.4%, complicates the outlook for Bank of England rate cuts. Persistent price pressures, noted since late last year, suggest that aggressive easing may not happen soon. The fight against inflation may take longer than anticipated.

Market Expectations for Bank of England Meeting

As a result, the upcoming Bank of England meeting on February 5th will likely maintain the rate at 3.75%. Markets have started to adjust, with anticipated cuts now around 35 basis points for all of 2026, down from over 40 just a week prior. This shift indicates that the potential for quick rate reductions has decreased. For those trading interest rate derivatives, it’s important to be cautious with positions that depend on significant rate cuts in the near future. The repricing in Short Sterling or SONIA futures might continue, leading yields to increase slightly as the market adapts to this reality. Any signs of economic strength will probably reinforce this trend. This persistent inflation is beneficial for the British Pound, which was already the strongest major currency against the US dollar last week. It may be wise to use options to capitalize on GBP/USD strength, particularly since the pair has found strong support around the 1.3340 level from January 19. Selling puts below this level could be a promising strategy to earn premiums. Our cautious outlook is backed by the latest ONS retail sales data for December, which unexpectedly rose by 0.5%, going against predictions of a drop and indicating strong consumer behavior. A similar trend occurred in 2023, when markets that anticipated rate cuts faced sudden reversals once inflation proved more resilient than expected. Historically, underestimating inflationary pressures can lead to costly errors. Create your live VT Markets account and start trading now.

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