UK manufacturers experienced a setback in August according to the latest CBI data. Total orders dropped to -33, falling short of the expected -28 and marking the lowest level since June.
The output forecast for the next three months also decreased, moving to -13 from a previous -6, the lowest recorded since May. Rising costs are reportedly impacting margins and making customers more cautious, which is negatively affecting orders and output.
Uk Economy Losing Momentum
Today’s manufacturing data is a clear warning sign that the UK economy is losing momentum faster than anticipated. The sharp drop in total orders suggests that corporate clients are pulling back on spending. This confirms the trend we’ve seen developing since the second quarter.
This report is particularly concerning when viewed alongside the most recent economic statistics. The last inflation reading for July 2025 came in stubbornly high at 3.4%, while Q2 GDP growth was nearly flat at just 0.1%. This combination of slowing activity and persistent cost pressures points towards a difficult stagflationary environment.
The Bank of England is now in a very tight spot ahead of its September meeting. Given this clear evidence of weakening demand, we believe the chance of another interest rate hike is now effectively zero. The market will quickly begin pricing in the possibility of rate cuts in early 2026.
Bearish Outlook on British Pound
For our positioning, this reinforces a bearish outlook on the British pound. We see potential in buying GBP/USD puts with strike prices below the 1.2350 level, as a break of this support now seems increasingly likely in the coming weeks. Selling sterling futures is another direct way to express this view.
The outlook for UK-focused equities, especially the FTSE 250 index, has also darkened considerably. Squeezed margins and falling output will directly translate into weaker corporate earnings reports later this year. We should consider buying put options on the index to hedge against or speculate on a move towards its year-to-date lows.
We also anticipate a rise in market volatility as this economic uncertainty filters through. This environment is favourable for purchasing options to play on wider price swings. The current setup reminds us of the conditions in late 2022, when similar stagflationary fears led to significant downward moves in both the currency and domestic stock markets.
