Insights 
VT 
The UK manufacturing sector is experiencing a slowdown. The CBI total orders figure for July is -30, compared to the expected -28 and a prior figure of -33.
Although there is a slight improvement, the sector’s outlook remains fragile. Companies are still reducing investment and cutting jobs as they face challenging conditions.
Challenges Facing The Sector
High input costs and labour shortages persist, affecting margins. Global supply chain disruptions are also impacting production capacity.
Firms report subdued and unpredictable demand, which adds to the uncertainties in the market. The situation requires close monitoring as the second half of 2025 approaches.
Based on this latest release, we believe the outlook for UK domestic assets is deteriorating. The slight improvement in the headline figure is misleading when firms are actively reducing investment and headcount. This points to a deeper lack of confidence in the economic recovery.
We see this as a clear signal to increase bearish positions on the UK’s domestic economy, particularly through the FTSE 250 index. Unlike the more international FTSE 100, this index is highly sensitive to the health of local manufacturing and consumer demand. We are considering buying put options on a FTSE 250 ETF to capitalize on expected weakness.
Impact On Currency And Market Strategy
The data further pressures Sterling, as the Bank of England will struggle to maintain a hawkish stance amid a clear industrial slowdown. Recent SONIA futures pricing shows the market is already trimming bets on further rate hikes, with an implied 45% chance of a rate cut by the first quarter of next year. We favor shorting GBP against the USD, which benefits from a more resilient economic backdrop.
The report’s mention of high input costs alongside weak demand creates a stagflationary environment, which increases uncertainty. Implied volatility on Sterling options has ticked up to 8.2% for 3-month contracts, but we feel this may still be too low given the conflicting economic signals. We view long volatility strategies, such as buying a straddle on GBP/USD, as an effective way to trade the potential for a sharp move.
