Uk Inflation Forecast : What traders need to know | Errante

Market Overview

The UK inflation report is set to be the highlight of this week, offering critical insights for financial markets. Inflation data plays a significant role in shaping monetary policy, and traders are paying close attention to how the Bank of England (BoE) might respond. The central bank has been under pressure to manage persistent inflation levels while keeping an eye on growth and economic stability.

Recent numbers indicate that the situation remains challenging. Core inflation in the UK rose to 3.7% in January, which is a worrisome increase from the previous 3.2% and the highest it’s been since April 2024. Meanwhile, headline inflation remains elevated at 3.0%, surpassing the central bank’s target of 2.0%. These figures are well above both the prior reading of 2.5% and the forecasted 2.8%. With such stubborn numbers, the upcoming report will be closely watched for indications of what lies ahead for the economy and the pound (GBP).

Fundamental Factors

The BoE’s monetary policy decisions hinge largely on how inflation trends evolve. If inflation cools down and prints below expectations, it could give the central bank more room to accelerate rate-cut considerations. This would likely lead to a weaker pound, as traders adjust their forecasts accordingly. On the other hand, if inflation continues to stay elevated, markets could push back rate-cut expectations to a later date. Short-term GBP strength may follow, as delayed rate cuts are often associated with a tighter monetary stance.

February’s claimant count rose sharply to 44,200, significantly exceeding the forecasted 15,000, while wage growth remained steady at 5.9%, fueling inflation concerns for the Bank of England. In response, the Monetary Policy Committee (MPC) decided to keep the policy rate unchanged at 4.50%, with a vote of 8-1, as Dhingra was the sole member supporting a rate cut. The guidance also remained consistent, with the BoE aiming to end 2025 with a policy rate of 3.75%.

The latest S&P Global Flash UK PMI survey showed private sector growth, with the service sector reporting its fastest expansion since August 2024, driven by strong sales. However, manufacturing struggled with weak exports and falling production due to global uncertainty and potential US tariffs.

For traders, two major currency pairs—GBP/USD and EUR/GBP—will be key areas of focus. GBP/USD may react strongly given its sensitivity to both monetary policy shifts and the broader US dollar trends. On the flip side, EUR/GBP will provide insights into how GBP compares against the euro, especially as the European Central Bank (ECB) also contends with its inflationary challenges. Market sentiment leading up to the report will also influence the trading direction, adding another layer of complexity.

Technical Analysis

The GBP/USD pair faced a key turning point around March 19th, 2025 (FOMC), when it hit a high of approximately 1.3015. After reaching this peak, the currency pair experienced a sharp decline, forming a “no demand” setup along with a fair value gap and an overall lower low candles formation. The market has since tested the 4-hour order block, which previously served as a significant resistance area. A minor head and shoulders pattern can also be observed. If the order block is broken to the upside, bullish momentum may be expected, given that there are potential arguments in favor of the GBP.

Conversely, a break below the support area around 1.290, which has already been tested, could signal a continuation of the bearish move. Globally, there are concerns about slower economic growth, and inflation is once again being viewed as transitory. Furthermore, uncertainty arises from the Bank of England’s terminal rate set at 3.75% without clear guidance. This lack of clarity adds to the overall cautious sentiment in the forex market, where USD-centric weakness is present but financial institutions remain wary due to unclear outlooks, leading to frequent choppiness.

Conclusion

A lower-than-expected inflation print could signal a dovish turn for the BoE, putting more downward pressure on GBP. Alternatively, persistently high inflation could delay policy easing, giving the pound some short-lived strength. Traders should remain vigilant, monitor key pairs like GBP/USD and EUR/GBP, and stay prepared to adapt as market signals unfold. With inflation at the center stage, volatility is almost guaranteed—so stay sharp!

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