U.K. GDP Data Reinforces Rate Cut Prospects, Sterling Impact, Notes MUFG

06:25 AM EST, 12/12/2025 (MT Newswires) -- The Bank of England is set to impose a rate cut by 25bps next Thursday and the United Kingdom gross domestic product data released earlier Friday will certainly help reinforce those expectations, said MUFG.

Real GDP contracted by 0.1% month over month in October, which followed a similar contraction in September. The economy has certainly taken a hit with three contractions in the last four months and the last month of expansion came in June, wrote the bank in a note to clients.

The British government will likely get the blame here, with budget uncertainty cited as a factor causing a pull-back in activity in October ahead of the budget, stated MUFG. If the budget is a key factor, then the November GDP is likely to be poor as well.

It was the services that were the primary factor in dragging the economy down in October, with services activity contracting by 0.3%. Construction activity contracted by 0.6% while there was a partial offset in manufacturing with a 1.1% increase.

BoE Monetary Policy Committee (MPC) members have cited in recent public comments that there has been greater evidence of disinflation in the services sector and the GDP data will only reinforce that view and strengthen the prospect of a BoE rate cut next week, pointed out the bank. The vote at the November meeting was 5-4 favoring no change, so Governor Andrew Bailey switching to join the dissenters in November would be enough for a majority favoring a cut next week.

The GDP data could help swing one other MPC member in favor of a reduction, possibly Huw Pill. Megan Greene, Clare Lombardelli and Catherine Mann look less likely to join the vote for a cut. So a 5-4 or 6-3 vote looks most likely now, added MUFG.

Sterling (GBP) is little changed in response to Friday's data, which is understandable given a rate cut is close to fully priced, according to the bank. Sterling has gained versus the US dollar (USD) following the broad-based US dollar sell-off, but has weakened versus the euro (EUR).

MUFG expects that pattern to continue with sterling underperforming within the G10 space. The lack of move in GBP also reflects the other big event risk next week -- the United States nonfarm payroll (NFP) data releases for both October and November, noted the bank. Federal Reserve Chair Jerome Powell was clear in his press conference on Wednesday that the reason for the Fed cutting with inflation above target was the weakening labor market.

If the data confirms that again next week, further US dollar selling into year-end seems very likely. Further labor market weakness is a core assumption of MUFG's US dollar bearish view ahead.

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