UK markets advanced further this week, with the FTSE 100 Index rising 2.5% to trade at 10,695 points at the time of writing.
UK consumer price index inflation fell sharply to 3% in January, strengthening the case for the Bank of England to cut interest rates at its next meeting in March. The figure from the Office for National Statistics marked a slowdown from December’s 3.4% figure and was the lowest rate since last spring. This was in line with the expectations of economists polled by Reuters.
The Bank of England held interest rates at 3.75% this month but it was a close decision, with some policymakers arguing for an immediate 0.25% cut due to weakening demand and a cooling labour market.
The UK central bank is predicting inflation will fall to roughly its target level of 2% from April, thanks in part to Budget measures aimed at curbing bill increases. January’s decline in price growth, which brought the headline figure down to its lowest level since March last year, was driven by food prices and transport, particularly air fares.
Education costs also pulled the index lower as last year’s VAT rise on school fees dropped out of annual comparisons. Core consumer price inflation, which excludes energy, food, alcohol and tobacco, slipped to 3.1% from 3.2% in the 12 months to December 2025.
Services inflation, which is closely watched by the Bank of England as a sign of underlying pressures, fell from 4.5% to 4.4%. This left it higher than the Bank of England’s forecast of 4.1% services price growth, but analysts said this was unlikely to deter the central bank from lowering rates next month.
The UK jobless rate increased to a post-pandemic peak of 5.2% at the end of last year as wage growth slowed, fuelling the case for another quarter-point rate reduction. The unemployment rate hit 5.2% in the three months to December, its highest level in five years, compared with 5.1% over the previous three-month period, according to the Office for National Statistics.
Youth unemployment rose to 16.1%, the highest in more than a decade, including a spike during the pandemic, a trend many economists link to higher payroll costs that deter employers from entry-level jobs. The Bank of England is watching the slowdown in the UK jobs market closely as it gauges when next to lower its interest rates.
Annual growth in average weekly wages, excluding bonuses, slowed to 4.2% in the last three months of the year, the Office for National Statistics said, down from a revised 4.4% in the three months to November.
Elsewhere, UK retail sales in the UK rose 1.8% in January, the largest monthly increase since May 2024 and far ahead of the 0.2% rise expected by economists.
Commodity markets
In the commodity markets, Brent crude futures traded around $71 per barrel on Friday and are set for a weekly rise, as investors priced in potential supply disruptions amid concerns of a potential US-Iran conflict. The main concern for the oil market is that a flare-up in tensions could disrupt shipping in the Strait of Hormuz. About 20% of the world’s oil consumption passes through the waterway.
US President Donald Trump has said the next 10 days will decide if the US strikes Iran or does a deal with the Islamic republic, as Washington steps up the deployment of a massive military force to the Middle East. President Trump has previously given similar timelines only to act far sooner than they indicated.
The US has been sending additional military assets towards the region in recent days after President Trump ordered one of the biggest build-ups in the area since the 2003 US-led invasion of Iraq. The USS Abraham Lincoln aircraft carrier is currently in the region and a second aircraft carrier, the USS Gerald Ford, is enroute.
Meanwhile, two days of peace talks in Geneva between Ukraine and Russia ended on Wednesday without a breakthrough, with Ukrainian President Volodymyr Zelenskiy accusing Moscow of stalling US mediated efforts to end the four-year-old war.
Gold prices traded around $5,030 an ounce on Friday and are set to end the week little changed, as the dollar climbed to a one month high. Despite markets in Mainland China, Hong Kong, Singapore and Taiwan being closed for the Lunar New Year holidays, prices have been steady, which shows there is still a lot of buying in lower levels for gold.
Equity markets
US equity futures rose on Friday, as investors positioned for key economic releases that could influence expectations for Federal Reserve monetary policy.
In Thursday’s regular trading session, the Dow Jones Industrial Average fell 0.54%, the S&P 500 lost 0.28%, whilst the Nasdaq Composite declined 0.31%.Minutes released on Wednesday of the Federal Open Market Committee’s January 27-28th meeting showed Federal Reserve policymakers anticipated US inflation would continue to slow towards its 2% goal, despite the pace and timing of the decline remaining uncertain.
However, most participants cautioned that progress towards the committee’s 2% objective might be slower and more uneven than generally expected and judged that the risk of inflation running persistently above the committee’s objective was meaningful.
The Federal Open Market Committee voted last month to hold borrowing costs steady following three straight 0.25% cuts, leaving the federal funds rate in a range of 3.5 to 3.75%. Two governors dissented from the decision, voting instead for a further 0.25% cut.Federal Reserve chair Jay Powell said after the January meeting that the committee would probably keep rates on hold for the foreseeable future as inflation edged lower and the labour market showed evidence of stabilisation.
Wednesday’s minutes made it clear that most committee members backed this position, with policymakers indicating it would likely be appropriate to hold the policy rate steady for some time as the committee carefully assesses incoming data. Several members went further, noting a rate rise “could be appropriate if inflation remains at above target levels”. The Federal Reserve targets price stability and maximum employment.
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