Energy Prices And Inflation Outlook
The impact of higher energy prices on inflation is tied to how long disruption in the Strait of Hormuz lasts. Rabobank’s energy team expects the disruption to continue. Rabobank now expects UK CPI inflation to edge down to 2.5%, rather than return to just above 2% as previously forecast. It then expects CPI to rebound to 2.75% in Q3. May includes local elections in England and parliamentary elections in Scotland and Wales. Rabobank states that a poor Labour result could trigger a leadership challenge for Prime Minister Starmer, and that GBP could be weaker into mid-year and beyond. Looking back at analysis from early 2025, we saw the pound’s strength against the euro was linked to diminishing hopes for Bank of England rate cuts. Now in March 2026, this dynamic of inflation versus central bank policy remains the key driver for the currency pair. The market is still trying to price in the timing of the first move from the BoE.Political Risk And Range Breakout
The forecast for sticky UK inflation last year proved correct, preventing the price pressures from falling back to the 2% target. We have seen the latest figures from the Office for National Statistics show that the Consumer Prices Index remains elevated at 3.4%, well above the Bank’s goal. This persistent inflation continues to support the pound by forcing the BoE to maintain a restrictive stance. Last year, there was a focus on the May 2025 local elections and the potential for a leadership challenge that could weaken sterling. While that specific risk has passed, the underlying sensitivity of the pound to political news and the UK’s high debt level, which currently stands at nearly 100% of GDP, is a lesson we must carry forward. Any questions about fiscal stability will likely weigh on the currency. The view in 2025 was for EUR/GBP to grind higher towards 0.87, but the pair has instead remained more contained, currently trading near 0.8550. Given the persistent inflation in the UK but ongoing political risks, traders should consider using options to position for a potential breakout from this range. Buying out-of-the-money EUR/GBP call options could be a low-cost way to prepare for any sterling weakness later in the year. Create your live VT Markets account and start trading now.
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