UK inflation surprise sparks FTSE rally as rate cut bets firm

Inflation undershoots as price pressures ease

​UK inflation delivered a welcome surprise, falling to 3.2% in November from 3.6% the previous month. The reading came in below consensus expectations, marking the latest evidence that the inflationary spike has passed its peak.

​Food and non-alcoholic beverage inflation slowed to 4.2%, nearly a full percentage point below Bank of England (BoE) forecasts. This easing in grocery costs will be particularly welcome news for households, even if beef prices remain stubbornly elevated.

​The broader decline suggests that the lagged effects of previous rate hikes are finally working through the economy. Core inflation measures also softened, reinforcing the view that underlying price pressures are retreating from their highs.

​This marks a turning point in the inflation narrative. After months of sticky readings that kept policymakers cautious, the data now supports the case for a more dovish stance from the BoE.

​Markets price in earlier rate cuts

​The inflation surprise triggered an immediate repricing of rate expectations. Markets moved closer to fully pricing in a BoE cut, with around 58 basis points of easing now expected by end-2026.

​This shift represents a material change in sentiment. Just weeks ago, traders were positioning for rates to remain higher for longer. The November consumer price index (CPI) print has upended that view and brought forward expectations for monetary easing.

​The bond market responded decisively. UK gilt yields fell across the curve, with two-year yields down around seven basis points. The move outperformed shifts in European sovereign debt, reflecting the UK-specific nature of the inflation surprise.

​For those looking to track these moves, our trading platform provides real-time access to gilt futures and other interest rate products. The repricing creates both opportunities and risks depending on how the BoE responds at upcoming meetings.

​FTSE 100 enjoys strongest session in months

​The FTSE 100 rose as much as 1.3%, marking its strongest session since May. The rally was broad-based, with support coming from multiple sectors after recent losses had left the index looking oversold.

​A weaker pound provided additional tailwinds for international earners. With roughly 70% of FTSE 100 revenues generated overseas, sterling weakness typically boosts the index by making foreign earnings more valuable when translated back into pounds.

​The rally suggests investors are becoming more optimistic about the UK economic outlook. Lower inflation opens the door for rate cuts, which should support growth and ease pressure on corporate margins.

​The FTSE 250 outperformed even more strongly. Mid-caps are more domestically focused and thus more sensitive to UK interest rate expectations. Property stocks and homebuilders led the gains as falling yields improved their valuations.

​Sterling slides as dovish bets build

​The pound slid about 0.8% against the dollar and also weakened versus the euro. Currency markets interpreted the inflation data as tilting the BoE towards earlier rate cuts compared to other major central banks.

​Sterling's move was amplified by a rebound in the dollar, which had been under pressure in recent sessions. The combination of US dollar strength and UK dovish repricing created a particularly sharp move in cable.

​Forex trading opportunities have increased as markets digest the implications. The pound faces further downside if upcoming data continues to support earlier BoE easing.

​However, sterling weakness isn't necessarily negative for UK assets. As noted above, it supports the FTSE 100's international earners and could help boost competitiveness for exporters. The impact depends heavily on your exposure.

​Energy stocks lifted by oil rebound

​Brent crude oil moved back above $60.00 a barrel amid fresh geopolitical tensions. The move pushed Shell and BP more than 2% higher, providing significant support to the FTSE 100 given their heavyweight status in the index.

​Oil's rebound comes after weeks of weakness driven by demand concerns. The latest price action suggests markets are reassessing downside risks, particularly as supply dynamics tighten in key regions.

​Commodity trading has become more volatile as geopolitical factors compete with economic fundamentals. Energy stocks remain sensitive to these price swings, creating both opportunities and risks for equity traders.

​For UK-focused investors, energy stocks offer useful diversification. Their revenues are largely insulated from domestic economic concerns, instead tracking global oil prices and broader commodity trends.

​Corporate news adds to positive tone

​Serco raised its profit outlook, providing a boost to the support services sector. The upgrade suggests corporate confidence remains intact despite ongoing economic uncertainties around UK growth prospects.

​Bunzl reiterated its 2025 guidance, offering reassurance that the distribution group sees no immediate threats to its earnings trajectory. Consistency like this is valuable when many companies are adopting a more cautious stance.

​Greencore cleared a key regulatory hurdle for its Bakkavor deal. The development removes a significant overhang from the stock and allows management to proceed with integration planning for the transformational acquisition.

​European shares also rose, led by banks and resource stocks. The moves suggest falling UK inflation and higher oil prices are supporting risk sentiment across the region, not just in London markets.

​What it means for traders

​The inflation surprise has shifted the landscape materially. Rate cut expectations have firmed, sterling has weakened, and UK equities have enjoyed their best session in months. The question now is whether this marks a sustainable turning point.

​For traders looking to capitalise on these moves, timing is crucial. The FTSE 100's rally may extend if further data supports earlier BoE easing. But much depends on whether inflation continues to fall or if we see a renewed pickup in coming months.

​The key risk is that markets have moved too far, too fast. If upcoming economic data disappoints or the BoE pushes back against dovish bets, we could see a sharp reversal. Managing risk remains essential even as sentiment improves.