Energy-Driven Inflation Returns, Markets Price in More Hawkish Central Banks

Summary:

UK PMI data point to a clear slowdown in economic momentum, while inflationary pressures are resurging. Against the backdrop of persistently rising energy prices, oil is increasingly becoming a more structural driver of inflation.

BUY GBPUSD

EXP

PENDING

1.30290

Entry Price

1.36300

1.28650

1.34147 +0.01244 +0.94%

Pips

PENDING

1.28650

Exit Price

1.30290

Entry Price

1.36300

Fundamentals

Economic activity in the UK cooled notably in March, while inflation pressures picked up simultaneously, raising stagflation concerns. The Services PMI dropped sharply from 53.9 to 50.5, marking its lowest level since April 2025. The Composite PMI also fell from 53.7 to 50.3, indicating that overall economic expansion slowed to its weakest pace in six months.

The rapid loss of growth momentum is primarily driven by deteriorating demand conditions. Escalating geopolitical tensions have intensified risk aversion, prompting both businesses and consumers to cut spending and delay investment decisions, which in turn has weighed heavily on services output.

At the same time, cost pressures have risen significantly. Input cost inflation accelerated to an 11-month high in March, largely driven by higher fuel, transportation, and broader supply chain costs. Firms widely reported that suppliers are passing on higher costs downstream, further squeezing corporate margins.

Under the dual pressure of slowing growth and rising inflation, market sentiment has weakened considerably. Business confidence has fallen sharply from the 15-month high seen in January, with firms expressing concerns over fragile domestic conditions and rising borrowing costs.

From a broader perspective, the sustained strength in oil prices is reshaping the inflation landscape. Energy costs are no longer just a short-term disturbance but are increasingly becoming a core medium-term inflation driver. Previous expectations of two to three Fed rate cuts this year have largely been priced out.

According to LSEG data, money markets now expect US policy rates to remain broadly unchanged in 2026, with a slight tightening bias. Meanwhile, markets have begun pricing in more hawkish paths for both the ECB and the Bank of England, with approximately 74 basis points and 56 basis points of rate hikes, respectively, by year-end. This largely reflects the impact of imported energy inflation in Europe.

Energy-Driven Inflation Returns, Markets Price in More Hawkish Central Banks_1

Technical Analysis

GBP/USD continued to trade within a range on Tuesday. Structurally, the head-and-shoulders pattern remains intact, suggesting that medium-term downside risks persist.

A decisive break below the key level at 1.3037 could extend the downtrend from 1.3867 and lead to a test of the structural support near 1.3008.

However, it is important to note that a sustained breakout above 1.3490 would signal the end of the prior downtrend. In that case, the market could shift into a recovery phase, with stronger upside momentum likely to follow.

Trading Recommendation

Direction: Long

Entry: 1.3029

Target: 1.3630

Stop Loss: 1.2865

Valid Until: 2026-05-06 23:55

Support Levels: 1.3159, 1.3126, 1.3036

Resistance Levels: 1.3286, 1.3347, 1.3490

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