The UK Retail Price Index (RPI) rose by 3.8% year on year in January. This was below the forecast of 3.9%.<\/p>\n
The result was 0.1 percentage points under expectations. It indicates a slightly lower annual RPI inflation rate than predicted for the month.<\/p>\n
The January RPI figure coming in slightly below forecast at 3.8% reinforces the view that inflation is on a firm downward path. This continues the trend we observed throughout 2025, when the headline rate fell consistently from above 5%. We now see an increased probability that the Bank of England will move to cut interest rates sooner than previously expected.<\/p>\n
In response, we are seeing the front end of the curve react, with Short Sterling or SONIA futures for the second quarter gaining ground. The market is now pricing in a near 80% probability of a 25 basis point cut by the May Monetary Policy Committee meeting, up significantly from around 60% last week. This makes positioning for lower yields through interest rate derivatives an increasingly popular trade.<\/p>\n
Gilt futures are a direct beneficiary of this sentiment, and we expect further upward momentum in the coming weeks. The 2-year Gilt yield, which is highly sensitive to Bank Rate expectations, has already fallen 10 basis points in early trading. We saw a similar dynamic in late 2023 when softer inflation data led to a sharp rally in government bonds.<\/p>\n
This prospect of earlier rate cuts is weighing on Sterling. We anticipate the GBP\/USD currency pair will struggle to maintain levels above 1.28 as the UK’s yield advantage over the US narrows. Derivative traders should consider buying GBP puts as a straightforward way to position for potential downside in the pound.<\/p>\n
This inflation data does not exist in a vacuum; it comes after Q4 2025 GDP figures showed the economy barely grew at 0.1%. This combination of falling inflation and economic stagnation provides a strong foundation for our view that the Bank will prioritize growth. This gives us confidence that the path of least resistance for UK rates is lower.<\/p>\n
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