The UK’s unemployment rate for May 2025 was reported at 4.7%, surpassing the expected 4.6%. This figure marks the highest unemployment rate since 2021. Employment change figures showed an increase of 134,000, more than double the 46,000 anticipated. Average weekly earnings matched expectations, rising by 5.0%, with previous figures slightly revised to 5.4% from 5.3%.
Conflicting Labor Market Indicators
Excluding bonuses, earnings also rose by 5.0%, slightly above the expected increase of 4.9%. June payrolls saw a decrease of 41,000, though this was an improvement over May’s revised decrease of 25,000 from 109,000. The Bank of England faces a challenge as rising unemployment and declining real wages test their economic strategies. Total pay decreased to 1.0%, and regular pay to 1.1% in the three months to May, the lowest since mid-2023.
Based on the information from Mr. Low, the latest labour market report presents a conflicting picture, but the headline jump in the jobless rate is the most significant signal for us. While employment creation beat expectations, the rising unemployment trend to its highest since 2021 confirms a cooling economy. This reinforces our view that the Bank of England is moving closer to an interest rate cut.
Consequently, we are positioning for a weaker sterling in the coming weeks. We see value in purchasing GBP/USD put options or establishing short positions in sterling futures. The persistent, albeit slowing, wage growth is not enough to deter the central bank from easing policy in the face of a weakening jobs market.
Monetary Policy Implications
We believe the UK interest rate market is under-pricing the pace of future easing. Historically, once a central bank begins a cutting cycle after a period of high rates, like the one from 2022-2024, the moves can be swift. Therefore, we are looking at SONIA futures contracts that bet on lower overnight rates later this year.
For equity markets, the prospect of lower borrowing costs should provide a tailwind for UK stocks. We anticipate this will support the FTSE 100 index. Call options on the index could offer a capital-efficient way to gain exposure to this potential upside.
This mixed data will likely increase short-term market uncertainty leading into the next policy meeting. As of mid-2024, the UK unemployment rate was already trending up at 4.4%, so this new higher figure will heighten debate and could spike implied volatility in sterling options. We can use strategies like straddles if we expect a large move in either direction but are unsure of the timing.
