The British pound rose against the US dollar but declined against the euro following data showing ongoing weakness in the UK labour market. Job losses have increased both in December and predictions for 2025, with easing wage growth and subdued private-sector pay potentially leading the Bank of England to implement further rate cuts, totalling 50 basis points over the next year.
The unemployment rate has remained at a pandemic-era high of 5.1%, consistent with October figures and aligning with the Bank of England’s projection. Labour demand has weakened, with notable job cuts of 43,000 in December and 184,000 projected over 2025, marking the fastest annual pace of job reductions since 2021.
Easing Wage Pressures
Easing wage pressures could enable the Bank of England to pursue additional cuts as private sector regular pay growth has dropped to a five-year low of 3.6% year-on-year. Compared to the consensus of 3.7% and the October figure of 3.9%, it aligns with the Bank of England’s Q4 projection of 3.5%. There is an 80% probability that the Bank of England will reduce rates by 50 basis points to 3.25% over the next year, adversely impacting the pound.
The persistent weakness in the UK job market is a significant signal for the coming weeks. We saw job losses accelerate throughout 2025, with payrolled employment falling by 184,000, the quickest pace since 2021. This leaves the unemployment rate stuck at 5.1%, giving the Bank of England (BOE) a clear mandate to ease monetary policy.
This labor market data is reinforced by other recent statistics showing a cooling economy. The latest inflation figures for December 2025 fell to 2.1%, putting price growth right at the BOE’s target and removing a key barrier to rate cuts. Furthermore, Gross Domestic Product (GDP) figures showed the economy contracted by 0.1% in the final quarter of 2025, confirming a broader slowdown.
Strategies for Derivative Traders
For derivative traders, this environment suggests establishing bearish positions on the British pound. Selling GBP futures or buying put options on currency pairs like GBP/USD could be effective strategies to capitalize on expected sterling weakness. These positions will profit if the pound depreciates as the market fully prices in the anticipated rate cuts.
With the market already expecting 50 basis points of cuts, a more nuanced strategy could involve options that trade volatility. Buying straddles or strangles ahead of the next BOE policy meetings could be advantageous. This allows traders to profit from a large price swing in either direction, which is likely as the exact timing and magnitude of the cuts are debated.
We saw a similar economic picture during the post-pandemic slowdown in 2020 and 2021, where a weak labor market kept interest rates at rock bottom and capped any significant strength in the pound. That historical period suggests sterling is likely to underperform against its major peers until we see a clear and sustained recovery in UK economic data. The path of least resistance for the pound appears to be downwards.
