The latest British labour market report fell short of expectations, revealing more job losses than predicted and a revised negative outlook for September. This unexpected decline in jobs led to a small increase in the unemployment rate. Wage growth in the UK is slowing down. This opens the door for the Bank of England to think about cutting interest rates in reaction to a weakening economy. An interest rate cut is likely to happen in December, with another possible cut next year, based on current data trends.

Challenges For The Chancellor

The finance minister might find some comfort in the upcoming growth estimate for the third quarter, which has mostly been driven by government spending. However, the Chancellor faces a tough job with her new budget due at the end of the month, especially with the slow growth in the private sector over the past three years. These economic issues suggest there are further risks of the pound losing value. Recent data show that the British labour market is weak. The unemployment rate unexpectedly rose to 4.4%, according to the latest figures from the Office for National Statistics, while last month’s job losses were revised down even more. This indicates a cooling economy that hasn’t met hopes for improvement. This slowdown is also affecting wages. Annual wage growth has dropped to 5.2%, even as inflation holds steady at 5.0%. This decline in real household income raises major concerns and gives the Bank of England a solid reason to take action. We’ve seen this pattern before, where weakened consumer health leads to a shift towards a more lenient monetary policy. The market now strongly believes that the Bank of England will cut interest rates next month. Current data from the derivatives market, based on SONIA futures, suggests there is over an 85% chance of a 25-basis-point reduction in December. This indicates a long period of lower interest rates, with at least one more cut expected in early 2026.

Downside Risks For The Pound

Due to this negative combination of factors, we think the risks for the pound are leaning towards a decline in the coming weeks. Traders may want to prepare for further depreciation, perhaps by buying GBP put options against the dollar or euro. These options would benefit from a drop in the pound’s value while limiting risk. We recall how the pound reacted poorly in late 2023 when similar weak data was released, resulting in a sharp drop. Implied volatility in the options market is already rising ahead of the upcoming third-quarter growth estimate and the Chancellor’s new budget at the end of the month. These two events are likely to trigger the pound’s next move. The private sector has experienced nearly no growth for almost three years, with most economic expansion driven by government spending. Economists predict only a tiny 0.1% growth for the third quarter, which, if proven correct, would further support the negative outlook. Any unexpected downside in that data will likely speed up the pound’s decline. Create your live VT Markets account and start trading now.

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