On Monday, international oil prices surged 25% due to escalating geopolitical tensions in the Middle East, exacerbating concerns about upside inflation risks and prompting investors to reassess the BoE's monetary policy path. UK government bond prices fell sharply as markets fully priced out any chance of a BoE rate cut this year, instead assigning a roughly 57% probability to a 25-basis-point hike in December. Attention is focused on whether G7 finance ministers will reach a consensus on releasing emergency oil reserves. Meanwhile, domestic political pressure in the UK is mounting: Prime Minister Keir Starmer reaffirmed his commitment to supporting working people, interpreted as a signal that the government may introduce new energy subsidies to ease household living cost pressures. These measures would further strain already tight fiscal space. Finance Minister Rachel Reeves will brief parliament later Monday on the government's economic strategy to address the Middle East situation. Lloyds Bank estimates that a mere 2.5 percentage point rise in inflation would be enough to deplete the government's £23.6 billion fiscal buffer, a calculation that does not account for potential cost-of-living support plans or additional shocks from slower economic growth. The UK's inflation shock has unique characteristics. While eurozone inflation may be slightly higher due to energy prices, Oxford Economics notes that if shipping disruptions in the Strait of Hormuz persist for two months, UK inflation could rise 0.4 percentage points more than the eurozone's projected 0.5 percentage point increase. More notably, the UK's inflation transmission mechanism is stickier: January's inflation rate remains high at 3%, well above the eurozone's 1.7%, and public expectations for long-term inflation still exceed pre-Ukraine crisis levels. Persistently high energy prices could further entrench wage and price expectations, making it harder for inflation to decline.

According to the New York Fed's Consumer Expectations Survey on Monday, US consumers' inflation expectations held broadly steady in February, though views on the labor market and current/future financial conditions diverged. The median one-year inflation expectation edged down from 3.1% in January to 3%, while three-year and five-year expectations remained flat at 3%. Notably, the survey was conducted between February 2 and 28 and thus does not reflect recent oil price spikes driven by global energy supply disruptions. Markets widely agree that sharp energy price increases will almost certainly push already elevated headline inflation higher and likely lead the public to form more pessimistic expectations about future price pressures—posing new challenges for the Fed. After prolonged high inflation, progress toward returning inflation to the 2% target has been slow. Fed officials unanimously emphasize that public inflation expectations heavily influence their policy stance; if energy price shocks drive expectations higher, the Fed's inflation-fighting task will get more complex. The survey also shed light on labor market conditions: while overall employment was relatively muted, respondents perceived lower risks of future unemployment and personal job loss compared to January estimates. However, they also viewed finding new jobs as harder than initially expected at the start of the year. On credit and finances, respondents reported greater difficulty accessing credit in February than in January but expected improvement ahead. Assessments of current personal finances grew more optimistic month-on-month, while future financial outlooks remained stable. As a supplementary perspective, the University of Michigan will release its latest consumer sentiment report on Friday, which should provide timely insights into how the public incorporates recent energy price hikes into inflation expectations. Deutsche Bank economists noted in a Monday report that US domestic oil production helps cushion some of the impact from global oil price surges, but warned that inflation remaining too high for too long, combined with recent data casting doubt on the magnitude and certainty of disinflation, especially amid upward shifts in some inflation expectation metrics.

From a daily chart perspective, GBP/USD stabilized after breaking below the Bollinger Lower Band and the EMA200. While the downtrend has not yet ended, a corrective rally is likely. Resistance lies near the EMA50 and the Bollinger Middle Band, at 1.348 and 1.352, respectively. The Bollinger Bands are opening downward, and moving averages are diverging lower, indicating a bearish trend. A MACD golden cross—if formed—would trigger a rebound; otherwise, prices may fall below 1.33 again. The RSI stands at 44, reflecting dominant selling pressure. Based on the 4-hour chart, the Bollinger Bands are opening upward, moving averages are flattening, and prices are oscillating higher along the Bollinger Upper Band. The short-term rally is unlikely to end and will probably extend to the EMA200. The RSI is at 57, signaling a wait-and-see market sentiment. Overall, GBP/USD is expected to rise first before falling, and selling at highs is recommended.

Trading direction: Sell

Entry Price: 1.343

Target Price: 1.3

Stop Loss: 1.37

Support: 1.32/1.3/1.28

Resistance: 1.38/1.4/1.41