UK average earnings including bonuses rose by 4.2% in the three months to December. This was below expectations of 4.6%.
The data covers pay growth measured over a three-month period compared with a year earlier. It shows earnings growth slowed relative to forecasts.
Uk Wage Growth Surprise
The December 2025 wage growth figure of 4.2% came in well below the 4.6% we were expecting, signaling the UK labor market was cooling more rapidly than anticipated at year-end. This data point is a significant indicator of reduced inflationary pressure from wages. It suggests that the tight labor conditions seen throughout much of 2025 may finally be easing.
This news, combined with the most recent January inflation report showing CPI at 2.8%, shifts our expectations for the Bank of England’s policy. The case for an earlier interest rate cut in the second quarter is now much stronger. We should anticipate the market to more aggressively price in monetary easing over the coming weeks.
For those trading SONIA futures, this means we should expect the forward curve to continue its downward shift, reflecting lower rate expectations. Looking back at how markets reacted to the first signs of a peak in inflation during 2023, we saw a rapid repricing, and a similar dynamic could unfold now. This suggests positioning for lower UK rates is the logical path forward.
Market Implications And Trades
In the currency options market, the outlook for the pound sterling weakens considerably. Lower interest rate differentials, particularly against the US dollar, will likely pressure GBP/USD lower. We should consider purchasing put options on the pound to hedge or speculate on further downside, as recent CFTC data shows speculative long positions are already being unwound.
For UK equity indices, the signal is mixed but leans towards caution. While lower rates could be supportive, the reason for them—a weakening economy and consumer—is a concern for corporate profits. We should be wary of domestic-focused stocks, perhaps using options on the FTSE 250 to position for increased volatility or to protect portfolios from a slowdown in consumer spending.
