Deutsche Bank analysts Sanjay Raja and Shreyas Gopal say renewed energy price shocks are worsening uncertainty around the UK inflation outlook. They report oil prices are up nearly 15% this week, while spot gas prices are up 70%. They add that if these moves continue, expected disinflation in the UK could slow or stop. They expect pump prices to rise in coming months, and warn of a large change in dual fuel bills in July.

Energy Shock And Inflation Persistence

They say the 2022 energy shock remains relevant for the Bank of England when judging how long inflation may last. They warn that higher energy prices could affect inflation next year through second-round effects, including firm inflation expectations and higher wage settlements. They estimate about half of the UK CPI basket is highly sensitive to energy prices. They say this sensitivity extends beyond fuels to items such as food and services, and that services on average are more energy-intensive than core goods. They list travel fares, restaurants, and accommodation as services that are highly sensitive to energy prices. They conclude that this could affect the pace and size of Bank of England rate cuts. Geopolitical tensions are flaring up, creating a significant layer of uncertainty for the UK’s inflation outlook. Brent crude prices have jumped to nearly $98 a barrel this week following renewed disruptions in the Strait of Hormuz, and UK natural gas futures have followed suit. This sharp rise in energy costs is an immediate concern for the market.

Market Positioning And Asset Implications

This energy spike threatens the disinflationary path we saw for much of 2025. The latest CPI reading for February 2026 already showed inflation stalling at a stubborn 3.1%, and these higher energy prices will soon feed through to consumers at the pump. This situation puts the once-certain prospect of the UK leading disinflation among G7 economies at serious risk. For the Bank of England, the memory of the 2022 energy crisis will loom large, increasing fears of persistent inflation. This makes the Monetary Policy Committee less likely to initiate the rate cuts the market has been anticipating for the second quarter. The risk of second-round effects, such as higher wage demands, will make them exceptionally cautious. Given this, we should re-evaluate interest rate positions, as swaps markets are likely pricing in too many rate cuts for this year. Fading the current pricing on Short Sterling or SONIA futures could be a prudent move, anticipating that the Bank of England will hold rates higher for longer. This repricing could cause a significant move in front-end yields. This hawkish shift also has implications for currency and equity markets. A more hesitant Bank of England could provide support for the British Pound, making call options on GBP/USD attractive. Conversely, higher energy costs and borrowing rates squeeze domestic company margins, suggesting put options on the FTSE 250 index may offer a valuable hedge. Overall uncertainty means volatility is likely to increase across UK assets. We should consider strategies that profit from larger price swings, regardless of direction. Buying straddles on major UK indices or currency pairs could be an effective way to position for the turbulent weeks ahead. Create your live VT Markets account and start trading now.

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