The unemployment rate in the UK for May 2025 was 4.7%, higher than the expected 4.6%. This is the highest rate since 2021. Employment increased by 134,000, which is more than double the predicted 46,000. Average weekly earnings rose by 5.0%, meeting expectations, while previous figures were slightly adjusted from 5.3% to 5.4%.

Conflicting Labor Market Indicators

When excluding bonuses, earnings also increased by 5.0%, just above the expected 4.9%. However, payrolls in June dropped by 41,000. This is an improvement over May’s revised decrease of 25,000, which was originally 109,000. The Bank of England is facing challenges as rising unemployment and falling real wages put pressure on their economic plans. Total pay fell to 1.0%, while regular pay reached 1.1% in the three months to May, marking the lowest point since mid-2023. According to Mr. Low, the latest labor market report shows a mixed picture. However, the sharp increase in the unemployment rate is a crucial signal. Although job creation exceeded expectations, the rising unemployment rate, now at its highest since 2021, indicates a slowing economy. This suggests that the Bank of England is considering an interest rate cut. As a result, we are preparing for a weaker pound in the upcoming weeks. We find it worthwhile to buy GBP/USD put options or take short positions in sterling futures. Ongoing wage growth, though slowing, is unlikely to stop the central bank from easing policies due to the struggling job market.

Monetary Policy Implications

We think the UK interest rate market is underestimating how quickly easing will happen. When central banks begin to cut rates after a long period of high rates, as occurred from 2022 to 2024, the changes can happen rapidly. Thus, we are looking into SONIA futures contracts that predict lower overnight rates later this year. Lower borrowing costs should help boost UK stocks, benefiting the equity markets. We expect this to support the FTSE 100 index. Buying call options on the index could be an efficient way to capitalize on this potential growth. This mixed data may increase uncertainty in the market as we approach the next policy meeting. By mid-2024, the UK unemployment rate was already on the rise at 4.4%, so this new higher figure will spark more debates and could lead to higher implied volatility in sterling options. Strategies like straddles can be useful if we anticipate significant movement in either direction but are unsure when it will occur. Create your live VT Markets account and start trading now.

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