Market focus turns to UK inflation as December’s data edges higher, but the path back toward the 2% target remains in view. What could this mean for interest rates and currency markets?
Key Insights
• Expectations remain for two UK interest rate cuts
• Markets remain on alert for further Trump commentary
Market Recap
The US dollar weakened further as political risk drove market sentiment. Pressure intensified after a major Danish pension fund announced plans to reduce its holdings of US Treasuries, highlighting growing credit concerns linked to Trump’s policy agenda. The move added to existing USD softness, which was already being fuelled by renewed tariff threats from Donald Trump against Europe including a potential 200% levy on French wine, and renewed tension over Greenland.
While some view the recent pullback in Treasuries as a standalone event, markets are becoming increasingly alert to US political developments. The broader takeaway is that persistent policy uncertainty could encourage greater diversification away from US assets, a dynamic that may continue to weigh on the dollar if political rhetoric remains elevated.
Market Overview:
UK inflation edged higher in December, with headline CPI rising to 3.4% and services inflation increasing to 4.5%, largely reflecting temporary factors such as air travel costs. Despite this short-term rise, the wider inflation picture continues to point toward a gradual move back to the 2% target over the course of this year. However, underlying pressures are easing at a measured pace and inflation expectations remain elevated, reinforcing the case for a cautious approach from the Bank of England.
For now, markets still expect the first interest rate cut to arrive in either April or June, with a further reduction priced in later in the year. With no major UK data due today, attention shifts to Donald Trump’s special address at Davos. While markets are relatively steady after his suggestion of potential dialogue with the EU over Greenland, investors remain alert to any policy signals that could influence risk sentiment.
21st January 2026
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