A sharper-than-expected drop in UK inflation has increased the likelihood of further rate cuts. Could this put more pressure on the pound?

Key Headlines:

• New Tariff Threats: Trump has signalled potential additional tariffs on the EU and Canada. How might this impact global trade and market sentiment?
• UK Inflation Declines: A sharper-than-expected drop in UK inflation has increased the likelihood of further rate cuts. Could this put more pressure on the pound?

Recap

The pound weakened yesterday following a lower-than-expected inflation reading, which saw markets increase odds of a rate cut in May by 80%. Meanwhile, the UK budget had little market impact, but the Office for Budget Responsibility (OBR) downgraded GDP growth projections for this year from 2% to 1%, with expectations of a rebound in 2026.

Elsewhere, market sentiment took a hit after Trump signed an order imposing 25% tariffs on car imports, taking affect next Wednesday. He later warned of broader tariffs on the EU and Canada if they collaborate in ways that harm the US economy. This comes amid rising trade tensions, with France pushing the European Commission to deploy its most powerful trade defence tool—the anti-coercion instrument (ACI)—which could allow the EU to retaliate against US tariffs. These developments add uncertainty to global trade, with potential implications for currencies, equities, and inflation trends.

Today’s Key Takeaways

• US Data in Focus: Final Q4 GDP and core PCE figures are due today, but given they are the third revision, any market impact is expected to be minimal. However, initial jobless claims could trigger some movement. Several central bank speakers from the ECB, Fed, and BoE are also on the agenda—what signals might they send?
• Euro Under Pressure: The euro is slightly weaker this morning as markets raise the probability of an April ECB rate cut to 80%. Concerns over potential double-digit US tariffs on the EU next week are also weighing on sentiment. How could this impact trade and inflation?
• UK Inflation and Rate Cut Prospects: February’s inflation drop keeps a May BoE rate cut on the table, with some economists suggesting a quarterly easing cycle could follow. If correct, rates could fall to 3.75% by year-end—lower than current market expectations of 4%. Could this mean further downside for the pound?

How do these developments affect your market outlook? Let us know your thoughts.

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