TD Securities expects UK headline inflation to ease to 3.1% year-on-year in January, down from 3.4% in December. It forecasts core inflation at 3.2% year-on-year, unchanged.
The firm links the drop in headline inflation to base effects in food and energy. It expects services inflation to be about 4.4% year-on-year and core goods inflation at 1.0% year-on-year.
Uk Labour Market Stabilisation
TD Securities expects the unemployment rate to hold at 5.1%. It says this level is the highest since 2021, while employment changes suggest the labour market is stabilising.
The firm forecasts wage growth to slow across measures. It expects private sector pay growth to move towards 3.25%.
The January 2026 inflation data showed headline CPI falling to 2.9%, broadly confirming the cooling trend we anticipated last year. However, core inflation proved stickier than expected, printing at 3.3% as services inflation remains persistent. This divergence is keeping the Bank of England cautious, as reflected in their recent statements.
Given this stickiness, interest rate markets have pushed back the timing of the first BoE rate cut, now pricing it for August instead of May. We should consider selling short-dated SONIA futures, specifically the June and September 2026 contracts, to position for rates staying higher for longer. This strategy profits if the central bank maintains its current stance through the first half of the year.
Sterling Range Trading
For the Pound, this creates a conflicted outlook that will likely limit strong directional moves, pinning GBP/USD in a range. Selling volatility appears to be the most prudent strategy, perhaps through an iron condor or a simple strangle on GBP/USD options. One-month implied volatility has already compressed from over 9% in late 2025 to around 7.8%, and we expect it to drift lower.
The labour market picture reinforces this view, as unemployment has held steady around 5.0% for two consecutive quarters, according to the latest ONS data. This stability removes any urgent need for the BoE to stimulate the economy with rate cuts, a situation reminiscent of the policy plateau we observed in 2019. This strengthens the case for range-bound currency markets and stable short-term rates.
