UK manufacturers faced a setback in August, as per the latest CBI data. Total orders fell to -33, lower than the expected -28, marking the lowest since June. The output forecast for the next three months also declined, dropping from -6 to -13, the lowest since May. Rising costs are affecting profit margins and making customers more cautious, which negatively impacts orders and output.

UK Economy Losing Momentum

Today’s manufacturing data signals that the UK economy is losing momentum faster than expected. The significant drop in total orders suggests that businesses are cutting back on spending, confirming a trend seen since the second quarter. This report is particularly alarming when combined with recent economic stats. July’s inflation rate was stubbornly high at 3.4%, and Q2 GDP growth was nearly flat at just 0.1%. This mix of slowing activity and ongoing cost pressures hints at a tough stagflationary environment. The Bank of England is in a difficult position ahead of its September meeting. With clear signs of weakened demand, we believe the likelihood of another interest rate hike is virtually zero. The market will likely start considering rate cuts in early 2026.

Bearish Outlook on British Pound

Our analysis supports a bearish outlook on the British pound. We see potential in buying GBP/USD puts with strike prices below 1.2350, as a breakdown of this support seems likely in the coming weeks. Selling sterling futures is another direct way to express this opinion. The outlook for UK-focused equities, particularly the FTSE 250 index, has also worsened. Squeezed margins and reduced output will lead to weaker corporate earnings reports later this year. We should think about buying put options on this index to protect against or speculate on a drop toward its year-to-date lows. We also expect market volatility to rise as economic uncertainty continues. This situation is favorable for purchasing options to profit from larger price swings. The current market setup reminds us of late 2022, when similar stagflation fears caused significant declines in both the currency and domestic stock markets. Create your live VT Markets account and start trading now.

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