The UK economy is expected to grow by a modest 0.5% in the third quarter (Q3), according to NIESR. This growth is driven by strong service and construction activity, along with supportive government policies, despite some weakness in external conditions. NIESR points out that the negative growth seen in April and May could actually help boost Q3 figures. However, they warn that fragile public finances might lead to budget cuts in the Autumn.

Impact Of Policy Uncertainty

The institute has highlighted that ongoing uncertainty in government policy could harm the UK’s debt outlook, representing a risk to their growth prediction. They emphasize that this is just an early estimate, and various factors could still change the economic situation in Q3. The UK economy is sending a positive signal with a forecast of 0.5% growth for the third quarter. This could lead to slight increases in UK investments, like the FTSE 100 and the Pound, in the coming weeks, encouraging traders to adopt cautiously optimistic strategies. This outlook is backed by a slowing decline in the job market. Unemployment has remained steady at 4.4% for the three months ending in June 2025. The recovery from poor performance in April and May also helps boost expectations for Q3. This may favor short-term call options on UK indices or long positions in GBP/USD, which is currently around 1.28. However, we need to consider the significant concerns regarding the UK’s fragile public finances. The government is likely to propose budget cuts this Autumn, which could quickly erase any short-term benefits. The possibility of future austerity measures or tax increases could overshadow this otherwise positive outlook.

Strategies For Market Volatility

This situation is tricky, as the Bank of England faces pressure from persistent inflation, which remained stubbornly high at 3.5% in July 2025. High policy uncertainty often leads to market fluctuations, as seen during the disruptions following fiscal announcements in late 2022, reminding us how quickly market sentiment can shift. With a positive short-term growth outlook yet significant medium-term policy risks, investing in volatility itself may be wise. We should explore strategies that benefit from large market swings in either direction as we approach the Autumn Budget announcements. Implied volatility on FTSE options expiring late in the fourth quarter may be quite attractive. In the coming weeks, we should focus on any government statements about the upcoming budget and inflation reports. Monitoring UK Gilt yields will also be crucial, as a sharp increase could indicate rising concern about the country’s debt. These factors will help determine market direction. Create your live VT Markets account and start trading now.

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