The British pound increased in value against the US dollar but fell against the euro after reports showed ongoing problems in the UK’s job market. Job losses rose in December, and forecasts for 2025 suggest even more, along with slower wage growth and modest pay in the private sector. This situation may lead the Bank of England to cut interest rates by a total of 50 basis points over the next year. The unemployment rate has remained at 5.1%, the same as in October, matching the Bank of England’s estimates. Job demand has declined, with 43,000 job cuts in December and an expected 184,000 job losses in 2025, marking the highest yearly rate of job cuts since 2021.

Easing Wage Pressures

Falling wage pressures could prompt the Bank of England to reduce rates further, as regular pay growth in the private sector has dropped to a five-year low of 3.6% year-on-year. This is below the expected 3.7% and the October figure of 3.9%, and aligns with the Bank’s forecast of 3.5% for Q4. There is an 80% chance the Bank of England will cut rates by 50 basis points to 3.25% in the next year, which could negatively affect the pound. The ongoing weakness in the UK job market is an important signal for upcoming weeks. We observed job losses increasing in 2025, with payroll employment dropping by 184,000, the highest rate since 2021. This keeps the unemployment rate steady at 5.1%, giving the Bank of England a strong reason to adjust monetary policy. These labor market statistics are supported by other recent data showing a slowing economy. Inflation for December 2025 dropped to 2.1%, meeting the Bank of England’s target and removing a major obstacle to cutting rates. Additionally, Gross Domestic Product (GDP) figures showed a contraction of 0.1% in Q4 2025, indicating a broader economic slowdown.

Strategies for Derivative Traders

For derivative traders, this environment suggests taking bearish positions on the British pound. Selling GBP futures or purchasing put options on currency pairs like GBP/USD could be smart strategies to profit from the anticipated weakness of the pound. These positions will gain if the pound declines as the market adjusts to the expected rate cuts. With the market already anticipating a 50 basis point cut, traders might also consider strategies that involve options trading volatility. Buying straddles or strangles before the next Bank of England policy meetings could be beneficial, allowing traders to profit from significant price movements in either direction, which is likely as discussions about the timing and size of the cuts continue. We saw a similar scenario during the post-pandemic slowdown in 2020 and 2021, where a weak labor market kept interest rates low and limited the pound’s strength. History suggests that the pound is likely to underperform against its major counterparts until there is clear and sustained improvement in UK economic data. The pound seems to be on a downward trajectory. Create your live VT Markets account and start trading now.

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