Traders Reverse Course on BOE Rate Cut Bets Amid Surge in UK Inflation Fears

Traders have sharply reduced wagers on a second Bank of England rate cut this year, reversing earlier bets on easing monetary policy. This pivot follows stronger-than-expected inflation data, with the UK’s annual headline inflation rising to 4.3% in February, above forecasts and the BoE’s 2% target. Core inflation remained elevated at 3.9%, suggesting underlying price pressures remain entrenched. The market reaction is evident in the UK 10-year government bond yield, which climbed to 4.87%—its highest level since late 2023—reflecting heightened expectations of prolonged higher interest rates. The yield surge has driven a re-pricing of long-duration assets, with the UK10Y’s effective duration falling by 18% over the past two weeks, indicating reduced appetite for fixed income exposure. In foreign exchange markets, the pound strengthened significantly, with GBP/USD rising to 1.2785, its highest level since January. This gain reflects a broader shift in investor sentiment toward rate-hike persistence. Meanwhile, the VIX index climbed to 18.3, signaling increased volatility in equity markets amid growing macro uncertainty, particularly for rate-sensitive sectors. Energy markets also reacted, with Brent crude (CL=F) rising 2.1% to $89.40 per barrel as stronger-than-expected global demand data and geopolitical risks bolstered commodity prices—further reinforcing inflation concerns. The combination of elevated inflation, firmer yields, and a stronger pound is now pressuring equity valuations and dampening risk appetite across European and US indices.