Inflation accelerated to 3.1% y/y in August, reaching a five-month high and rising noticeably from July's 2.9%, while core inflation remained at 2.6% for the fourth consecutive month. The headline index is accelerating solely due to energy prices, while underlying domestic price pressures show no signs of intensifying.

Retail sales increased by 0.5% m/m in August, fully reversing July's 0.5% decline, while the market had expected another decrease. On an annual basis, growth reached 2.4%, compared with the forecast of 1.6%.

The unemployment rate for the three months through July remained at 4.9%, while the number of employees on payrolls fell by 26,000 from July to August and by 145,000 year on year. Regular pay excluding bonuses remained stable at 3.5%; in the private sector, it was only 2.9%, while in the public sector it was 6.3%.

The Bank of England meeting on September 17 ended as expected, with the policy rate remaining at 3.75%. This was the fifth consecutive decision to leave rates unchanged since December last year. In its accompanying statement, the Committee explicitly stated for the first time that inflation risks had shifted to the upside, with the shift being more pronounced than in the July report.

BoE Governor Bailey acknowledged that the transmission of energy prices into the economy had been "fairly moderate," but immediately added that the longer this continues, the more difficult the task becomes. In his view, the only way to resolve the situation is for the conflict in the Middle East to end and energy prices to actually return to pre-conflict levels. Brent crude surpassed $100 per barrel last week for the first time since July. In the ten days leading up to September 6, an average of only 10 commercial vessels per day passed through the Strait of Hormuz, the lowest figure since May, while no very large crude carrier had left the Gulf since September 2.

The United Kingdom is highly dependent on gas, but its domestic storage capacity is limited. Therefore, during periods of peak demand or low renewable energy generation, the country has to rely on seaborne LNG supplies—and this is currently the most vulnerable segment. At the beginning of September, OPEC+ suspended its production increase for the first time since April, depriving the market of additional supply. As a result, prices are currently determined not by the balance of supply and demand, but by the availability of transportation, meaning that production decisions have almost lost their significance.

Investors are pricing in at least one rate hike by the end of the year, with a probability of around 75%, and approximately a 50% probability of a second hike. Bailey effectively said that such expectations are disconnected from the reality of the Bank of England's meetings. However, the market is looking not at rhetoric but at the energy price curve: as long as gas and oil prices continue to rise, higher interest rates will be priced in.

Speculative positioning in the pound remained unchanged over the reporting week, while the estimated price is moving increasingly lower.

A week earlier, we expected GBP/USD to decline if the Fed adopted a hawkish stance. This is exactly what happened: the pound fell below 1.3425 and reached the trendline at 1.3325, where it found strong support. We expect further downside, with gains limited by the technical level at 1.3410. Following a short correction, we expect attempts to break below 1.3325 toward the July low at 1.3272.