Oil Spike Boosts The FTSE While CPI Cements Rate Cut Expectations For BOE

The big story this morning is not only the moderation in UK inflation, but also the oil price. After dipping to a 5-year low on Tuesday on the back of concerns about a supply glut, President Trump sent the oil price higher on Wednesday, and Brent and WTI are both higher by more than 2% this morning.

Brent back above $60, for now

Brent crude has reversed its decline and is now back above $60 per barrel, after President Trump announced a ‘total and complete blockade of all sanctioned oil tankers’ going in and out of Venezuela. This is an unusual move, typically blockades need to be agreed by Congress, so this is a serious escalation of events. Venezuela holds the world’s largest share of oil reserves, hence why this blockade has caused ructions in the energy market.

Geopolitical risks boost oil price

The surge higher in the oil price has caused the FTSE 100 to soar on Wednesday. The index’s chunky energy sector is higher by more than 2%, led by big gains for Shell and BP. In Europe, Total Energies and ENI are leading the Eurostoxx index higher. The energy sector could remain elevated after the US also announced that it was readying more sanctions on Russia if President Putin rejects the latest peace deal with Ukraine. Although we think that the longer-term trend for the oil price is lower due to excess supply issues, there could be bouts of volatility caused by geopolitics.

Other themes driving asset prices today include the continued fall out from the NFP report for November. This did not shift the dial for further rate cuts from the Fed; the market is still expecting two rate cuts by the end of 2026. The dollar is the strongest currency in the G10 FX space, as recent losses get clawed back, and US cyclical stocks were lower on Tuesday. However, stock indices in the US are pointing to a higher open, as the energy sector bounces back, although the tech sector looks like it could remain under pressure through to year end, as AI fears remain.

UK CPI set to moderate further, as BOE could shift to the dovish side

The UK inflation print is also driving the pound lower this morning, and it is the weakest currency in the G10 FX space. UK Gilts are also outperforming, and yields continue to fall. The 2-year yield is lower by 4bps and the 10-year yield is down by 4.3bps. Digging a bit deeper, the softer than expected print saw inflation fall 0.2% MoM in November, the annual rate also moderated to a 3.2% annual growth rate, from 3.6% in October. Core inflation also came in at 3.2%, while service price inflation has also moderated to 4.4% from 4.5%.

This is still far from the 2% target rate; however, it has been enough to cement expectations of a rate cut from the BOE tomorrow. There is now a 97% chance of a cut, which is why Gilts are rallying and the pound is sliding. The longer-term market reaction to Thursday’s expected rate cut could be dependent on the vote split at the MPC. After an increase in the unemployment rate, combined with a softer CPI print, the vote split could be more dovish than expected, for example 6-3 rather than 5-4, which was expected last week. This could add to expectations that the BOE will need to cut rates further in 2026. Any sign that there will be more than 1 rate cut next year could weigh further on the pound and boost UK Gilts.

BOE has hill to climb to bring inflation back to 2% target  

The outlook for UK inflation remains positive. We could see a  sharp reduction in price pressures in the coming months, as the negative base effects from the first half of 2025 fall out of the index. However, structural inflation problems could still hurt the outlook for the inflation picture and make it very hard to get back to the 2% target rate. The BOE will be mindful of these risks, including in energy, construction and the labour market,  which could limit how dovish their message can get in the coming months, even as the growth outlook remains precarious.  

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