UK gross domestic product (GDP) rose 1.3% year on year in the fourth quarter. This was above the 1.2% forecast.
The release compares Q4 output with the same quarter a year earlier. The result beat expectations by 0.1 percentage points.
Because Q4 GDP was stronger than expected, the Bank of England has less reason to cut interest rates soon. Alongside January inflation, which is still high at 2.9%, this suggests the economy is holding up well. As a result, policymakers may sound more hawkish in the coming weeks.
For our positions, this supports a stronger British Pound. We see an opportunity in buying GBP/USD call options. The Federal Reserve is still signaling potential cuts later this year, which could widen the policy gap. In the second half of 2025, markets often underestimated UK economic strength, and similar Sterling trades worked well.
In interest rate markets, the upside GDP surprise suggests the SONIA futures curve may be mispriced. The market has been pricing in at least two rate cuts by the end of 2026, which now looks too optimistic. Selling the December 2026 SONIA futures contract is a prudent way to position for rates staying higher for longer.
This resilience is also supportive for UK-focused equities, especially the FTSE 250. Stronger domestic growth can lift earnings expectations, even if borrowing costs stay high. We think selling out-of-the-money puts on the FTSE 250 is a viable way to collect premium, based on the view that the data should help put a floor under the market.
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