In July, the UK economy showed no growth in its monthly GDP, which was expected. Earlier reports indicated a 0.4% increase. The services sector grew by 0.1%, better than the expected stagnation, but slightly less than the previous 0.3% growth. In contrast, industrial output fell by 0.9%, going against the prediction of stability and down from a gain of 0.7%.

Manufacturing Output Decline

Manufacturing output dropped by 1.3%, missing expectations of no change, after a previous rise of 0.5%. Construction output, however, increased by 0.2%, beating the forecast of a 0.2% decline, although it had previously grown by 0.3%. There are ongoing concerns about potential stagflation due to weak financial conditions and ongoing price pressures. The Bank of England is closely monitoring these economic signs. The flat GDP figure for July suggests the UK economy has reached a standstill. While the services sector provided some support, the significant declines in industrial and manufacturing outputs indicate that the productive side of the economy is struggling. This data reinforces the ongoing concerns about stagflation we’ve been noting. As a result, we expect further weakness in the British Pound. With August’s inflation data recently reported at a stubborn 4.1%, the Bank of England faces challenges and cannot indicate rate cuts to encourage growth. We should explore buying put options on GBP/USD, anticipating a decline to levels we haven’t seen since late 2022’s turmoil.

Impacted UK Equities

UK-focused equities, especially in the FTSE 250 index, are also expected to face difficulties. The latest retail sales data for August showed a 1.5% year-on-year decline, and this weak GDP report will likely dampen investor sentiment toward domestic companies. Selling FTSE 250 futures appears to be a sensible strategy against a weakening consumer and industrial environment. Interest rate markets will stay tense, creating opportunities in short-term interest rate (STIR) derivatives. Following aggressive rate hikes in 2023 and 2024 that raised the Bank Rate to 4.5%, there is uncertainty about the next steps. We believe the Bank of England will need to adopt a hawkish stance to tackle inflation, suggesting that yields might remain elevated for longer than currently anticipated. Overall, heightened volatility is expected in the coming weeks. The clash between a stagnant economy and persistent inflation provides little clarity on policy direction from the government or the central bank. Buying straddles or strangles on major UK assets before the next BOE meeting could be a wise way to navigate the anticipated uncertainty. Create your live VT Markets account and start trading now.

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