In July, UK employers reported the lowest pay increases since late 2021, with hiring also slowing down. Surveys showed that starting wages for new hires were very weak during this period. Median wage increases dropped to 3% in the three months before July, down from 3.4% in June. Only 9% of companies provided raises of 4% or more, a significant decline from the previous 39%.

Slow Growth in Starting Salaries

Recruiters noted that starting salaries for permanent jobs grew at the slowest pace in four and a half years. Additionally, candidate availability rose to its highest level since 2020 due to layoffs and concerns about job security. This decline in pay may ease inflation concerns for the Bank of England. However, employers are still cautious as they await Chancellor Rachel Reeves’ budget announcement in November, which may include tax increases. With the new data showing slowed pay and hiring, the Bank of England may have more reasons to cut interest rates. The drop in median wage growth to 3% suggests that inflation pressures from the job market are easing. This shift places a spotlight on UK interest rate derivatives, like SONIA futures, for anticipating a more dovish policy ahead. Recent inflation figures released in late August 2025 show that the UK’s Consumer Prices Index (CPI) fell to 2.1%, just above the Bank’s target. This is a significant decrease from the 3.9% rate at the end of 2023, making a case for relaxing policy further. Historically, when wage growth slows sharply alongside falling inflation, central banks have tended to lower borrowing costs within the next six months.

Impact on the Pound and Equity Market

The anticipation of lower interest rates is likely to put downward pressure on the pound sterling. We expect currency markets will start pricing in a rate cut before it happens, which may weaken GBP against the US dollar and the euro. As a result, we are considering put options on GBP/USD to take advantage of this expected decline in the coming weeks. Regarding the UK equity market, the outlook is more complicated. Concerns about possible tax hikes in the November budget could hinder growth. This caution among employers might lead to lower corporate investment and earnings, limiting any upward movement in the FTSE 250. Therefore, we are looking at protective strategies, like purchasing put options on UK stock indices, to guard against potential market weakness before the Chancellor’s announcement. The combination of economic slowdown and political uncertainty surrounding the budget is likely to increase market volatility. The gap between anticipated and actual policies from both the Bank of England and the government creates trading opportunities. This environment makes strategies that benefit from price fluctuations, such as long straddles on the FTSE 100, an attractive option in the coming weeks. Create your live VT Markets account and start trading now.

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