The UK final services PMI for July was 51.8, slightly higher than the preliminary 51.2 but lower than June’s 52.8. The final composite PMI reached 51.5 compared to a preliminary of 51.0, with the previous figure at 52.0.
There was a small rise in service sector activity, but there was a decline in new work, the steepest in over two-and-a-half years. Employment fell significantly since February, with rising payroll costs discouraging recruitment.
Rising Input Prices
Suppliers aimed to pass on increased employment costs, though the rise in input prices was the slowest since December 2024. Despite these pressures, service providers were optimistic about the future, with confidence boosting due to eased concerns about US tariffs and anticipated interest rate cuts in the latter half of 2025.
The UK services sector is still growing, but the pace has slowed down from the highs we saw in June. The real worry is the drop in new business orders and the sharpest decline in hiring since February of this year. This suggests the British economy is losing steam heading into the autumn.
We see this slowdown as significantly increasing the chances of an interest rate cut by the Bank of England later in 2025. With recent data from July showing that inflation is cooling, traders should consider using interest rate derivatives that would profit from a rate cut in the fourth quarter. These instruments are beginning to look more attractive given the weakening economic activity.
Pressure On The British Pound
This outlook will likely keep pressure on the British Pound, which has already struggled against the dollar in recent weeks. The prospect of lower UK interest rates makes the currency less attractive to hold. Using options to position for a further slide in the GBP/USD exchange rate could be a prudent strategy.
For the FTSE 100 index, the situation is more complicated, creating an opportunity to trade on volatility. While future rate cuts could boost stock valuations, the decline in new work signals potential weakness in corporate earnings ahead. This tug-of-war makes strategies that profit from price swings, rather than a clear directional move, more appealing.
