By James Tucker
The week started quietly with no major data releases especially in the UK and US, which left markets fairly stagnant as investors held on for more important data releases later this week. On Tuesday, the UK saw unemployment rise from 5.1% to 5.2% – its highest rate in five years, putting added pressure for the Bank of England to drop interest rates in March.
Mid-week attention turns to UK CPI inflation, a key release for monetary policy expectations. A softer inflation print would likely increase rate-cut expectations, while a stronger reading could provide short-term support for Sterling. The inflation release when it came dropped from 3.4% last month to 3%, heading towards the BOE’s 2% target.
With the interest rate vote being so close last month – five members voted to hold rates and four members voted for a drop in rates – the drop in inflation adds fuel to the fire that the BOE will cut interest rates in March. The forecast has been for interest rates to be cut a couple more times in 2026, with some delay predicted after recent rises in inflation, but with this reading firmly down we now expect those interest rate cuts sooner. Last year every time the BOE dropped interest rates the GBPEUR rate dropped as much as two cents in the following weeks, so for those with an upcoming currency purchase it might be worth considering locking in your rate sooner rather than later.
The US Dollar faces a data-heavy week – the release of the FOMC meeting minutes from the Federal Reserve will be closely analysed for guidance on inflation risks and the timing of future policy moves. Thursday sees US initial jobless claims, which provide an update on labour market conditions, while flash PMIs gauge economic activity.
Markets are balancing cooling UK labour conditions, Eurozone growth signals, and US inflation and policy expectations. Inflation data and central bank policy remain the dominant forces driving currency volatility. So, for those of you with Euro requirements do get in contact with your currency consultant to discuss the options available to you to mitigate risk in a volatile market.