UK gross domestic product growth rose by 1.3% year on year in the fourth quarter. This was above the forecast of 1.2%.
The release compares 4Q output with the same quarter a year earlier. The difference between the reading and the forecast was 0.1 percentage points.
Policy Implications For The Bank Of England
With the UK’s Q4 Gross Domestic Product showing more strength than we expected, the immediate takeaway is that the Bank of England has less reason to cut interest rates soon. This data point, combined with the recent January inflation reading which remained elevated at 2.9%, paints a picture of a resilient economy. Therefore, we should anticipate a more hawkish tone from policymakers in the coming weeks.
For our positions, this strengthens the case for a stronger British Pound. We see an opportunity in buying GBP/USD call options, as the Federal Reserve is still signaling potential cuts later in the year, creating a policy divergence. Looking back at the second half of 2025, we saw that markets repeatedly underestimated the UK’s economic momentum, presenting similar profitable trades in Sterling.
In the interest rate markets, this surprise growth means we should adjust expectations for the SONIA futures curve. The market has been pricing in at least two rate cuts by the end of 2026, which now looks overly optimistic. Selling the December 2026 SONIA futures contract appears to be a prudent strategy to position for rates staying higher for longer.
This economic resilience is also good news for UK-focused equities, particularly those in the FTSE 250 index. Stronger domestic growth translates directly to better corporate earnings outlooks, even if borrowing costs remain high. We believe selling out-of-the-money puts on the FTSE 250 is a viable strategy to collect premium, betting that this positive data will provide a floor for the market.
