Money-markets now see a 65% chance of a UK interest rate cut next month, we think it's been nailed on for some time..
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| It's a big week for the Pound and it's started as we expected. The unemployment rate rose to 5.2% in December (a 5-year high) with January seeing 11,000 pay-rolled jobs lost (5th consecutive month of declines).
The unemployment rate is roughly what economists anticipated at the beginning of last year and is nearly 1% higher compared to the end of 2024. Youth unemployment is now at the highest level in 10-years.
Job loss has been expected because of the extremely tough business conditions imposed by Labour (minimum wage increase, higher NI contributions and business rates).
This is of course is and has been a concern for the Bank of England and we fully expect the 'once-per-quarter' interest rate cut to arrive next month.
The 'nail in the coffin' is highly likely to arrive tomorrow morning with the UK's inflation report for January which is expected to fall to 3%. Any deviation from this will create market volatility, but we are anticipating volatility regardless as a 3% outcome would imply to everyone inflation is under control and heading to the 2% target comfortably this year.
The other crucial release as far as the BoE are concerned was this morning's wage data. Average earnings have been a major sticking point for the central bank in recent years, as higher wages contribute a fair bit to higher inflation. Average earnings for December fell from 4.7% to 4.2% and signals a very strong dis-inflationary trend.
Against the Euro in particular, this all represents bad news for the Pound..
As we have been reporting ever since the 'higher for longer' BoE play versus the EU's fast and consistent interest rate cut path, the interest rate premium (higher the rate, the stronger the currency) will collapse at some point.
Here's some context; in December 2024, the EU reduced their interest rate to 3% (4.75% UK), whilst GBP v EUR was having a 'field day' for some time at £-€1.20 mid-market (interest rate premium the main driver). By June 2025, the EU rate had dropped to and has stayed at 2% (4.25% UK).
During this time though, £-€ traded 4% lower because of many variables (BoE votes and rate cutting path concerns versus the EU's play included), but a key one being the realization for traders that the UK has to cut interest rates significantly in the near future and this will have a huge knock-on effect when they do (less foreign investment etc). Investors play the future game remember, not in the here and now.
The interest rate premium is the main variable as to why the majority of forecasts see GBP v EUR this year around 2% lower than where it is today.
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