The UK manufacturing sector is slowing down. In July, the CBI total orders figure was -30, slightly better than the expected -28 and the previous -33. Despite this small improvement, the sector’s future looks wobbly. Companies continue to cut investments and jobs due to tough conditions.

Challenges Facing The Sector

High input costs and worker shortages are still big issues, squeezing profit margins. Disruptions in global supply chains are also harming production capacity. Firms are experiencing weak and unpredictable demand, creating further uncertainties. This situation needs close attention as we move toward the second half of 2025. From this latest information, we think the outlook for UK domestic assets is getting worse. The slight rise in the headline figure is misleading since companies are cutting investments and jobs. This suggests a deeper lack of confidence in the economic recovery. We see this as a clear sign to take bearish positions on the UK economy, especially with the FTSE 250 index. Unlike the more global FTSE 100, the FTSE 250 is very sensitive to the local manufacturing sector and consumer demand. We are considering buying put options on a FTSE 250 ETF to take advantage of the expected weakness.

Impact On Currency And Market Strategy

This news puts additional pressure on Sterling, as the Bank of England may struggle to maintain a strong stance during a clear slowdown in industry. Recent SONIA futures pricing shows that the market is reducing expectations for further rate hikes, with a 45% chance of a rate cut by early next year. We prefer shorting GBP against the USD, which benefits from a more stable economic situation. The report talks about high input costs and weak demand, creating a stagflationary environment that raises uncertainty. Implied volatility on Sterling options has increased to 8.2% for 3-month contracts, but we believe this remains too low considering the mixed signals from the economy. We see long volatility strategies, such as buying a straddle on GBP/USD, as a smart way to prepare for potential sharp movements. Create your live VT Markets account and start trading now.

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