UK labour market data still look weak. HMRC payrolled employees fell for a fifth straight month. The January flash estimate shows an 11k drop.
Redundancies are still high, at 145k in the three months to Dec-25 (LFS data). The unemployment rate rose to 5.2% over the same period.
Labour Market Slack Increasing
The single-month unemployment rate is 5.4%. Youth unemployment hit 16.1% in the three months to December.
Among economically inactive people aged 16–64, 23% say they want a job. Surveys also suggest hiring plans are limited.
Deutsche Bank expects slack in the labour market to rise further. It forecasts two more Bank of England rate cuts this year, likely by summer.
This view is based on wage growth cooling and CPI moving closer to target by spring.
Implications For Rates
Ongoing weakness in the UK jobs market points to a clear direction for our strategy. As slack builds—shown by the unemployment rate reaching 5.2% in December 2025—we should expect the Bank of England to act sooner rather than later. We can position for lower rates using SONIA futures, which tend to rise as rate-cut expectations firm up.
This view is backed by fresh data released this week. The Office for National Statistics said the unemployment rate remains high at 5.3%. At the same time, wage growth has slowed to 4.0%, well below the highs seen in 2025. This gives the Bank of England more reason to start easing policy to support the labour market.
Rate cuts usually pressure the British Pound. We should consider trades that can benefit from a weaker sterling, such as buying GBP/USD put options. This could profit if sterling falls as the interest-rate gap with the US narrows.
We saw a similar pattern in earlier easing cycles, including after the 2008 financial crisis. Large rate cuts were followed by a weaker pound. Today’s backdrop—slower inflation and a flat jobs market—looks similar to past periods of currency weakness. So we should not assume this time will be different.
On the other hand, lower rates often support equities. We could consider buying call options on the FTSE 250, which is more focused on the UK economy. Rate cuts reduce borrowing costs for these firms and could help lift the market by summer.
Finally, a change in central bank policy can raise market volatility. Uncertainty about the timing and size of cuts can cause larger moves in both FX and equities. We may want to buy options that benefit from higher volatility, which can also act as a hedge regardless of market direction.
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