The Pound Sterling held steady against the euro and US dollar after UK inflation came in at 3.0%, as markets looked past the data and focused on the looming impact of higher oil prices.
UK Inflation Steady at 3.0%, but the Oil Shock is Yet to be Reflected
UK headline CPI came in at 3.0%, in line with expectations. Services and core CPI were slightly higher than estimates.
Inflation is expected to rise considerably over the coming months as higher oil prices filter through.
The pound was unchanged after the CPI release. Markets expect a hike in April from the BoE, but that hinges on how the Iran war develops.
Economic data has taken a back seat in recent weeks due to the Iran war and the spike higher in oil prices.
Any data that comes out now will only partially reflect the oil shock so they have little relevance to markets and to central bank policy.
That was plainly evident on Wednesday as UK CPI was released and had no effect whatsoever on the pound as it stayed unchanged against the USD and the euro.
UK CPI Hot and Will Get Hotter
The UK economy is navigating a treacherous path as the February 2026 Consumer Price Index report shows headline inflation stuck at 3.0%.
This reading is particularly alarming because it represents the state of the economy just before the full force of the Middle East energy shock hit global markets.
While the headline figure remained unchanged from January, the underlying Core CPI—which excludes volatile elements like food and energy—actually climbed to 3.2%.
This suggests that inflationary pressures have become embedded in the service sector, making the Bank of England’s mission to return to its 2% target significantly more difficult.
The primary drivers of this persistent inflation were unexpected price hikes in clothing, footwear, and household goods.
These increases were only temporarily masked by a slight dip in petrol and diesel prices, which were recorded just days before the Strait of Hormuz blockade sent crude oil prices spiraling.
Because these energy spikes are not yet reflected in the February data, analysts and policymakers are bracing for an upward spike in next month’s report, with many forecasting that headline inflation will surge past 3.5% by the summer.
This data has effectively killed any hope of a near-term interest rate cut from the Bank of England.
Having held the base rate at 3.75% in their March 19 meeting, the Monetary Policy Committee is now shifting toward an even more hawkish stance.
Market traders have moved from pricing in rate cuts to betting on a quarter-point hike later this year to prevent a “stagflationary” spiral where high energy costs and rising wages feed into one another.
An April 25bp BoE hike is now 72% priced, which may be excessive, but depends on how the Iran war and oil prices develop.
The message from BoE members has reinforced the hawkish shift.
Governor Andrew Bailey has signaled that the bank is prepared to keep rates high for the foreseeable future to act as a “firebreak” against the war-driven commodity surge.
On Tuesday, Huw Pill’s said that the ‘fog of uncertainty’ should not be an excuse for inaction.
For the British pound, the 3.0% inflation print went broadly unnoticed.
While higher-than-expected core inflation typically supports a currency, EURGBP remains anchored around 0.865 as markets balance out possible hikes from the BoE and from the ECB.
The ECB is perhaps the most likely to hike in April as they were likely to hike anyway later this year – the spike in oil prices has simply brought the timing forward.
The BoE, on the other hand, were on an easing bias when the Iran war started and rates in the UK are still historically high.
While they almost certainly now pause rather than cut again, hiking rates is perhaps a step too far, especially in light of a weak economy and cool jobs market.
