The UK is seeing a pause in its trend of reducing inflation, with expectations that inflation may increase slightly before reaching its peak. The deputy governor of the Bank of England, Dave Ramsden, highlighted the impact of food prices on household inflation expectations.
The labour market is showing signs of loosening, and wage growth is starting to return to normal. Ramsden suggests that loosening in the labour market helps maintain the inflation outlook, although there may still be some structural issues present.
Household Inflation Expectations
Household inflation expectations have become more sensitive to food prices since 2022. Despite concerns, Ramsden remains confident that inflation will return to target levels through current restrictive rates and market expectations.
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We are seeing that the UK’s progress on inflation has hit a pause, with a small increase possible before it finally peaks. The latest data from the Office for National Statistics supports this, showing Consumer Price Index inflation nudged up to 2.3% in August 2025, after briefly touching the 2% target earlier in the summer. This short-term stickiness could delay the Bank of England’s first rate cut, creating uncertainty for short-dated SONIA futures.
The key factor for the Bank of England remains the cooling labour market, which should anchor inflation in the medium term. Recent figures show UK unemployment has ticked up to 4.5%, while wage growth has moderated to its slowest pace in two years. Traders should therefore view any short-term inflation strength as temporary and look for opportunities to position for eventual rate cuts in 2026.
US Dollar Weakness
The main driver in the markets right now is US Dollar weakness, fueled by fears of another US government shutdown and the Federal Reserve’s dovish stance. This is pushing pairs like GBP/USD towards the 1.3450 level, a significant move from the sub-1.30 levels seen earlier in the year. We believe traders should consider buying call options on GBP/USD to ride this momentum, as dollar weakness appears to be the dominant theme.
This dollar softness, combined with expectations of Fed rate cuts, is propelling gold towards all-time highs. Fed funds futures are now pricing in a high probability of a rate cut before the end of 2025, which reduces the appeal of holding dollars. Consequently, using options to gain long exposure to gold, targeting prices above $3,850 per ounce, could be a prudent strategy to hedge against dollar depreciation.
For the pound, the situation is a tug-of-war between weakness in its main counterpart, the US dollar, and the Bank of England’s own inclination to eventually cut rates. While the dollar’s problems are the bigger story now, we remember the volatility of 2022, which showed how quickly sentiment on the pound can turn. This environment suggests using options strategies like straddles on GBP/USD, which can profit from significant price moves in either direction.
