Insights 
VT 
The September UK inflation reading suggests a dovish outlook for the Bank of England and impacts the pound. Headline inflation stayed at 3.8%, while core inflation decreased from 4.6% to 3.5%. Services CPI stabilised at 4.75%, which is 0.3 percentage points below the BoE’s latest forecast. Analysts note the main surprise was the decrease in food prices, now 0.5 percentage points below the BoE’s August forecasts.
The 3.8% figure is expected to be the peak for headline inflation, with anticipation it will remain at 3.5% for the year’s remaining months, before dropping in January. This data may not lead to a rate cut in November, but a December cut is increasingly likely. The Autumn Budget is a potential factor that could influence this decision.
Market Expectations And Currency Impacts
Markets are factoring in a 10 basis point easing for December. This opens the possibility for further pound depreciation unless there is a shift in current expectations. The forecast still suggests EUR/GBP strength towards year-end, aiming for a target of 0.88. These insights come from a group of journalists compiling expert analyses, including commercial notes and additional contributions from analysts.
With the date today being October 22, 2025, the September inflation report has sent a clear dovish signal to the market. Headline inflation came in at 3.8%, below the 4.0% consensus, but the real story was the sharp slowdown in core inflation to 3.5%. This suggests we have likely passed the peak for UK price pressures, altering the outlook for the Bank of England.
This dovish sentiment is being supported by other recent data points. Last week’s figures from the Office for National Statistics showed an unexpected 0.4% fall in September retail sales, indicating consumer demand is weakening. Consequently, interest rate swaps now imply a 45% probability of a 25 basis point cut in December, up from just 20% before the inflation print.
Investment Strategies And Potential Market Movements
For derivatives traders, this points towards positioning for a weaker pound Sterling over the next several weeks. The market is still only pricing in about 10 basis points of easing for the December meeting, leaving significant room for repricing if economic data continues to soften. This makes buying GBP put options, particularly against the US dollar, an attractive strategy to consider.
The primary catalyst will be the upcoming Autumn Budget, as a fiscally tight plan could seal the deal for a December rate cut. We saw a similar dynamic in late 2023 when markets rapidly priced in policy easing, and those who anticipated the shift profited. Therefore, building positions that benefit from falling UK interest rate expectations, such as paying fixed on short-term swaps or buying EUR/GBP calls targeting the 0.88 level, appears prudent.
