UK Inflation Surprise Complicates Rate-Cut Outlook for Early 2026

Economic

Summary:

UK inflation rose to 3.4 percent in December, slightly above expectations, reinforcing uncertainty over whether the Bank of England will move ahead with an interest rate cut in February despite easing pressures in the labour market....

Headline Inflation Edges Higher Than Expected

The UK inflation rate increased to 3.4 percent in December, exceeding the 3.3 percent forecast by economists surveyed by Reuters. The data marked a modest acceleration from November, when inflation cooled to 3.2 percent, a slowdown that had previously supported the Bank of England’s decision to cut interest rates at its final policy meeting of last year. While the increase was small in magnitude, it interrupted the recent disinflation trend and reintroduced caution into the policy outlook.

Core inflation, which strips out volatile components such as energy, food, alcohol, and tobacco, remained unchanged at 3.2 percent. This stability suggests that underlying price pressures have not intensified materially, even as headline inflation ticked higher.

Drivers Behind December’s Price Increase

According to the Office for National Statistics, December’s rise was driven primarily by higher tobacco prices following recently introduced excise duty increases. Temporary factors also played a role, with airfares rising more sharply than a year earlier, reflecting the timing of return travel over the Christmas and New Year period. Food prices contributed to the upside as well, particularly bread and cereals, indicating some persistence in essential household costs.

These upward pressures were partially offset by easing rents inflation and lower prices across several recreational and cultural categories. This offsetting dynamic points to a mixed inflation profile, where specific policy-driven and seasonal factors are lifting prices, while broader demand-related pressures continue to moderate.

Currency Reaction And Market Interpretation

Sterling showed little reaction to the data, trading largely flat against the US dollar at around $1.3231. The muted currency response suggests that markets view the inflation surprise as marginal rather than a decisive shift in the policy trajectory. Instead, investors appear focused on the broader trend, which still points toward gradual cooling rather than renewed inflationary acceleration.

The data arrive alongside recent labour market figures showing further cooling in employment conditions, complicating the interest rate outlook. While headline inflation remains above target, moderating wage growth has reduced fears of a wage–price spiral. This weakens the case for maintaining a restrictive stance for an extended period, even as short-term inflation volatility persists.

Scott Gardner of J.P. Morgan Personal Investing noted that a small monthly increase is unlikely to trouble policymakers in the near term, particularly given the downward trajectory in pay growth. He argued that if wage moderation continues and feeds through into inflation, it could eventually increase pressure on the Bank of England to cut rates more quickly than currently anticipated. Markets are pricing in one to two rate cuts over 2026, though that expectation remains sensitive to incoming inflation data.

Policy Caution Likely To Persist

Matthew Ryan, head of market strategy at Ebury, expects the central bank to remain on hold for at least the next couple of meetings. He pointed out that while more hawkish members of the Monetary Policy Committee have long warned about upside inflation risks, those arguments are losing traction as the employment outlook deteriorates and wage pressures ease.

This suggests a relationship of correlation rather than direct causation between December’s inflation uptick and future policy decisions. While higher prices complicate the narrative, they do not yet overturn the broader disinflation trend. As a result, the Bank of England is likely to prioritise confirmation of sustained moderation in wages and core inflation before committing to further rate cuts, keeping policy finely balanced as 2026 unfolds.

Source: CNBC

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Dark Current

Remarks of Officials

Commodity

Middle East Situation

Data Interpretation

Daily News

Traders' Opinions

Political

Economic

Energy

Oil prices declined on Wednesday as market focus shifted to an anticipated increase in U.S. crude stockpiles, outweighing the impact of a major production halt in Kazakhstan and persistent geopolitical tensions.

Brent futures fell by 97 cents, or 1.5%, to trade at $63.95 a barrel by 0745 GMT. At the same time, U.S. West Texas Intermediate (WTI) crude lost 78 cents, or 1.3%, to hit $59.58 a barrel.

The drop reverses gains from the previous session, where both contracts closed nearly $1 higher. Those earlier gains were driven by strong economic data from China and news of the production outage in Kazakhstan.

Kazakhstan Outage Offers Temporary Support

Output at the major Tengiz and Korolev oilfields, operated by OPEC+ producer Kazakhstan, was halted on Sunday due to issues with power distribution. According to industry sources, production could remain offline for another seven to ten days.

However, market analysts see this disruption as a short-term issue. IG market analyst Tony Sycamore noted on Wednesday that the production halt is temporary. He argued that persistent downward pressure from rising U.S. inventories and other geopolitical factors would likely dominate market sentiment.

All Eyes on Rising US Crude Inventories

The primary driver for the current price drop is the expectation of growing crude oil stockpiles in the United States.

A preliminary Reuters poll of six analysts on Tuesday indicated that U.S. crude inventories likely rose by an average of 1.7 million barrels in the week ending January 16. The poll also suggested that gasoline stockpiles increased, while distillate inventories probably fell.

Traders are now awaiting official data to confirm the trend:

• The American Petroleum Institute (API) will release its weekly inventory data at 4:30 p.m. EST (2130 GMT) on Wednesday.

• The U.S. Energy Information Administration (EIA) will publish its official figures at 12:00 p.m. EST (1700 GMT) on Thursday.

Both reports are being released one day later than usual due to a U.S. federal holiday on Monday.

Geopolitical Pressures Create Two-Way Risk

Adding to market concerns are ongoing geopolitical tensions. U.S. President Donald Trump's threat of new tariffs on European nations—tied to his goal of gaining control over Greenland—is weighing on oil markets by risking a slowdown in economic growth. Trump stated on Tuesday there was "no going back" on this objective.

However, other conflicts could still push prices higher. Gregory Brew, a senior analyst with Eurasia Group, said that the potential for U.S.-Iran tensions to re-escalate would help support oil prices. Trump recently threatened to strike Iran following its crackdown on anti-government protests.

Tensions flared after Iran's national security parliamentary commission was quoted on Tuesday stating that any attack on Supreme Leader Ayatollah Ali Khamenei would trigger a declaration of jihad.

"While the U.S. demurred from striking Iran immediately, tensions are likely to remain high as additional U.S. military assets move to the Middle East and diplomacy to de-escalate tensions fails to make progress," Brew commented in a note.

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Alexander

Central Bank

Remarks of Officials

Stocks

Bond

Traders' Opinions

Political

Economic

Forex

The Indian rupee tumbled to a record low on Wednesday, marking its most significant single-day drop in two months amid a global bond sell-off and rising investor anxiety over capital outflows.

The currency fell for the sixth consecutive session, hitting an unprecedented 91.7425 against the U.S. dollar. It ultimately closed at 91.6950, a 0.8% decline from the previous day's 90.9750.

Market traders noted that the fall was amplified by the Reserve Bank of India’s decision to refrain from intervening with dollar sales. As the worst-performing currency in Asia for the day, the rupee has already weakened by 2% this month, extending the approximately 5% decline it registered in 2025.

The USD/INR exchange rate trended consistently upward from 2025 to 2026, signaling a persistent weakening of the Indian rupee.

Persistent Outflows Rattle Markets

Many of the headwinds that pressured the rupee in 2025 have carried over into the new year. A key factor is the continued exit of foreign capital from Indian equities.

Foreign investors have already pulled around $3 billion from Indian shares in January, following record outflows of nearly $19 billion in 2025. This trend has put pressure on the domestic stock market, which fell 0.3% on Wednesday after its largest drop in over eight months the day before.

"Flows mainly drive the USD/INR pair, thus weakness may continue to persist with interim legs of intervention expected from RBI in case of excess volatility," said Kunal Sodhani, head of treasury at Shinhan Bank India.

Foreign investment data shows significant equity outflows from India in 2025, a trend that has continued into the current year.

Economic and Geopolitical Pressures

Analysts point out that while India’s current-account deficit is manageable, a lack of sufficient capital inflows leaves the currency vulnerable. This situation is worsened by importers, who are more inclined to hedge their dollar exposure than exporters are, anticipating further rupee depreciation.

According to India Forex Advisors, the currency will remain sensitive to shifts in corporate demand and portfolio flows. An increase in global risk aversion, fueled by factors like a global bond rout and U.S. threats regarding Greenland, would likely accelerate outflows and intensify the downward pressure.

Adding to the currency's challenges this year are several external factors:

• Regional Weakness: Unlike in 2025, most of the rupee's Asian peers are also experiencing weakness, removing a potential source of relative stability.

• Trade Deal Stalemate: A lack of progress on a trade agreement with the United States has deprived the rupee of a potential catalyst for inflows.

With multiple pressures mounting, investors are now closely watching for U.S. President Trump's upcoming speech in Davos for further direction.

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Warren Takunda

Economic

UK CPI inflation rose from 3.2% y/y in November to 3.4% in December, beating expectations for 3.3%.

The beat on expectations should, all else equal, be supportive of the pound as it lowers the odds of a second interest rate cut at the Bank of England this year.

The rise was driven by a 0.4% m/m increase in prices, up from -0.2% in November.

Core CPI was unchanged at 3.2% y/y, which was slightly softer than the 3.3% expected.

Services inflation, which is closely watched by the Bank of England, rose to 4.5% from 4.4%, even if this was slightly lower than expectations.

These data mean the Bank will be cautious in considering future interest rate cuts, even as job losses start to mount.

The GBP/EUR exchange rate - which has been under pressure over recent hours owing to a deterioration in market sentiment - rose to 1.1490 from 1.1460.

The GBP/USD was relatively unchanged at 1.3435.

Sterling's sanguine market reaction tells us there's nothing in the data to materially alter the Bank of England's interest rate path: There is enough concern about the jobs market to get another cut across the line by April.

However, inflation is still looking stubborn at these above-target levels. The split on the Bank's Monetary Policy Committee isn't likely to close, and this will ensure there's enough debate for the Bank to remain cautious.

"Core CPI broke a run of three consecutive months of MoM misses to the downside. A further miss could have made for an interesting MPC meeting on 5th Feb - but as it stands the market looks about right in pricing just a 5% chance of a 25bp cut," says economist Simon French at Panmure Liberum.

However, Kallum Pickering, economist at Peel Hunt, says "don’t sweat the UK inflation uptick, it won’t last."

He explains the December jump in the headline number was driven by erratic components such as tobacco duty and airfares.

"Importantly, measures of underlying price pressures offered comfort against the headline jump. Growth in core prices, which exclude energy, food, alcohol and tobacco, remained stable," he says.

Image courtesy of Peel Hunt. It shows that on an annualised basis, inflation is back to target.

On balance, the tick higher in prices should ensure UK bond yields remain supported, which can support the pound.

From a near-term perspective, however, the currency market will take its cues from geopolitics and headlines out of Davos concerning the EU-U.S. confrontation over Greenland.

Source: Poundsterlinglive

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Frederick Miles

Political

Economic

Remarks of Officials

Germany's economy could see 1% growth in 2026, but only if it can avoid a new round of U.S. tariffs, the BDI industry association warned on Wednesday. The group stressed that despite the potential for growth, the outlook for the country's crucial industrial sector remains fragile.

Amid rising global uncertainty, the BDI urged the German government to center its policy agenda on improving competitiveness, stimulating growth, and creating jobs. The looming threat of fresh U.S. tariffs adds significant pressure to export-driven European economies like Germany's.

BDI President Peter Leibinger stated that Europe must meet these tariff threats with a united and confident response. He argued that only a competitive and resilient European Union can negotiate from a position of strength.

Industrial Sector Lags Broader Economy

The BDI projects that Germany's industrial sector will likely expand at a slower pace than the overall economy this year, highlighting a key vulnerability.

"Only if we now give top priority to strengthening competitiveness and growth can we stop the downward trend in industrial production," Leibinger said.

To reverse this trend, the BDI outlined a series of reforms designed to invigorate the industrial base.

A Call for Pro-Growth Reforms

The association is advocating for measurable policy changes to unlock economic potential. Key proposals include:

• Cutting Bureaucracy: The BDI has already submitted 253 specific proposals to reduce red tape for businesses.

• Accelerating Permits: Speeding up the approval process for major industrial projects is seen as critical.

• Flexible Labor: The group called for allowing more flexible working-time models to adapt to modern economic demands.

Additionally, Leibinger suggested that bringing forward a planned cut in corporate tax could provide a direct growth impulse as early as 2026.

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Gerik

Economic

Political

China’s Criticism And Strategic Framing

Beijing intensified its criticism of the trade agreement reached last week between the United States and Taiwan, warning that the pact would drain Taiwan’s economic strength for the benefit of Washington. Peng Qingen, a spokesperson for China’s Taiwan Affairs Office, said the agreement would “only drain Taiwan’s economic interests,” accusing Taiwan’s ruling Democratic Progressive Party of allowing the United States to hollow out the island’s key industries. This framing reflects Beijing’s broader position that economic cooperation between Taiwan and countries maintaining diplomatic relations with China violates the one-China principle and undermines regional stability.

China considers Taiwan part of its territory, a stance repeatedly emphasized by Xi Jinping, who has described reunification with the mainland as a historical inevitability. Taiwan rejects these claims and continues to pursue closer economic and security ties with Washington, a dynamic that has become increasingly contentious as geopolitical rivalry between China and the United States deepens.

Structure Of The Trade Deal And Economic Trade-Offs

Under the agreement, U.S. tariffs on most Taiwanese exports were reduced to 15 percent from 20 percent, while tariffs were waived on generic drugs and ingredients, aircraft components, and certain natural resources not available domestically in the U.S. In exchange, Taipei committed to significant investment flows into the American economy. Taiwanese firms are set to invest around $250 billion directly in the United States to build and expand technology operations, including semiconductor and artificial intelligence facilities. The Taiwanese government also pledged to guarantee an additional $250 billion in credit to support its chip and technology companies as they scale up production in the U.S.

Taiwanese chipmakers will also receive higher quotas for tariff-free chip exports to the United States, reinforcing supply chain integration. U.S. Commerce Secretary Howard Lutnick said the goal is to relocate about 40 percent of Taiwan’s semiconductor supply chain to the United States. This target highlights a strategic objective rather than an immediate outcome, as it depends on sustained investment, workforce development, and technological alignment over time.

Semiconductors At The Center Of The Dispute

At the heart of Beijing’s criticism lies Taiwan’s dominant position in global semiconductor manufacturing. Taiwan Semiconductor Manufacturing Company, the world’s largest contract chipmaker, has already pledged $165 billion to build fabrication plants and a research and development facility in the United States. Reports suggest the company may construct four to six additional plants, potentially bringing the total number of U.S. facilities to more than ten.

China argues that such investments weaken Taiwan’s industrial foundations. Beijing has pointed to significantly higher labor costs at TSMC’s U.S. factories compared with those in Taiwan, implying that shifting production abroad could reduce efficiency and profitability. From China’s perspective, this supports its claim that Washington is “using Taiwan to contain China,” turning the island into a strategic asset rather than an independent economic actor.

Taiwan’s Response And Limits Of Industrial Migration

Taiwanese officials and experts have pushed back against the notion that the deal will hollow out the island’s economy. Analysts note that Taiwan continues to keep its most advanced semiconductor technologies at home, limiting the extent to which production relocation can undermine domestic capabilities. When asked about the U.S. ambition to achieve 40 percent chip self-sufficiency, Taiwan’s vice premier Cheng Li-chiun said the goal does not rest solely on Taiwan, emphasizing that U.S. chipmakers and other countries are also central to that strategy.

This highlights a relationship of correlation rather than direct causation between overseas investment and domestic industrial decline. While increased U.S. production may gradually diversify global supply chains, it does not automatically translate into an immediate loss of Taiwan’s technological edge, particularly as the island retains control over its most advanced processes.

Geopolitical Stakes And Economic Signaling

Taiwan’s central role in the global semiconductor supply chain gives the trade deal broader geopolitical significance. Nearly a third of global demand for new computing power is estimated to be met by Taiwan, making its de facto autonomy a strategic priority for the United States and its allies. The agreement therefore serves both economic and security objectives, deepening U.S.–Taiwan ties at a time when China has stepped up military and political pressure on the island.

From Beijing’s standpoint, the pact signals a tightening alignment between Washington and Taipei that threatens China’s regional influence. From Washington’s perspective, it represents a step toward supply chain resilience and reduced dependence on a single geographic hub. The tension between these interpretations underscores why the deal has become a focal point for broader U.S.–China rivalry, extending well beyond trade balances into questions of technology leadership, security, and long-term economic sovereignty.

Source: CNBC

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Isaac Bennett

Data Interpretation

Political

Russia-Ukraine Conflict

Remarks of Officials

Ukraine has appointed a new defence minister with a clear mandate: overhaul Europe's largest military with a data-driven strategy designed to give its forces a decisive edge against Russia's larger army. Mykhailo Fedorov, formerly the country's digitalisation minister, was appointed last week by President Volodymyr Zelenskiy to drive innovation and fortify Ukraine's defenses.

Fedorov's plan centers on rewarding battlefield results and implementing advanced technology to counter Russia's superior equipment.

Ukraine's new Defence Minister, Mykhailo Fedorov, is tasked with driving a data-centric overhaul of the nation's military.

A Mandate for Measurable Results

In his first remarks to reporters, Fedorov promised a sweeping reform of the defence ministry's management, emphasizing that performance will be the sole criterion for success. "If people don't demonstrate measurable results, they can't remain in the system," he stated.

His team has already compiled "high-quality data" to analyze ministry spending, identify potential savings, and address a significant budget gap. Fedorov stressed the importance of what he calls "the mathematics of war," underscoring that his approach will be built on systematic calculation and efficiency.

Boosting Battlefield Efficiency with Data

To translate this vision into action, the ministry will soon launch a mission control system for its drone operations. This platform will provide detailed data on the performance and effectiveness of drone crews, enabling better strategic decisions. A similar system is planned for artillery units.

"We need to see the full picture to simplify and speed up management decision-making," Fedorov explained. The ultimate goal is to increase Russian losses to an unsustainable level.

Leveraging Combat Data to Train Allied AI

Ukraine plans to establish a system that allows its allies to use its vast repository of combat data to train their military artificial intelligence models. Since Russia's full-scale invasion in February 2022, Ukraine has accumulated an invaluable trove of battlefield information, including:

• Systematically logged combat statistics

• Millions of hours of drone footage

This real-world data is critical for training AI to recognize patterns and predict outcomes. Fedorov has previously described this data collection as one of Ukraine's key negotiating assets. Ukraine is already using AI technology from the U.S. data analytics firm Palantir.

Fedorov also noted that his team is receiving strategic advice from prominent think tanks, including the Center for Strategic and International Studies (CSIS) and RAND in the United States, as well as the Royal United Services Institute (RUSI) in the UK, as he seeks to more actively integrate allies into defense projects.

Developing a Homegrown Mavic Drone Replacement

This month, Ukraine will begin testing a domestically produced replacement for China's widely used DJI Mavic drone, which serves as a primary reconnaissance tool for both sides of the conflict. The manufacturer's name was not disclosed.

This move addresses concerns about over-reliance on Chinese technology, especially given Beijing's close ties with Moscow. "We will have our own Mavic analogue: the same camera, but with a longer flight range," Fedorov confirmed.

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