The UK’s year-on-year gross domestic product (GDP) growth was 1% in the fourth quarter.
This was below the forecast of 1.2%.
Implications For Monetary Policy
The final Q4 2025 gross domestic product figure, coming in at 1.0% year-on-year, confirms the economic slowdown we have been anticipating. This miss against a 1.2% forecast puts immediate pressure on the Bank of England to reconsider its timeline for monetary easing. Consequently, the upcoming March Monetary Policy Committee meeting is now a key event to watch.
We see this data as a clear signal for continued weakness in Sterling over the coming weeks. With the latest January 2026 inflation report showing CPI has fallen to 2.3%, the Bank has more room to act. Traders should consider buying GBP/USD puts expiring in April to position for a potential rate cut, as overnight swaps are now pricing a 65% chance of a cut in March, up from 40% last week.
For equity markets, the FTSE 100 may prove resilient as its multinational companies benefit from a weaker pound. However, the domestic-focused FTSE 250 index looks far more vulnerable to the underlying economic weakness. A pairs trade, going long FTSE 100 futures and short FTSE 250 futures, could be an effective way to navigate this divergence.
The most direct trade is in UK government bonds, where we expect yields to fall further as the market prices in a more dovish central bank. This GDP report follows the weak December 2025 retail sales figures we saw last month, which showed a 0.8% contraction. This reminds us of the pattern in late 2023, when similar recessionary fears prompted a sharp rally in Gilts.
