The UK Index of Services (three months on three months) rose by 0.8% in March. Market expectations were 0.6%.
The reported figure was 0.2 percentage points higher than expected. The release compares outcomes for the latest three-month period with the previous three months.
Services Surprise Signals Resilience
The surprisingly strong UK services data from March indicates the economy is more resilient than we anticipated. This challenges the narrative of economic weakness we saw for much of 2025. Consequently, the odds of a summer interest rate cut from the Bank of England have likely decreased.
This shifts our focus in the interest rate markets. We are now less inclined to position for imminent rate cuts, with SONIA futures for the third quarter looking less attractive. Based on the latest inflation report showing CPI still at 2.5% in April, well above the 2% target, the Bank of England has little reason to rush a policy change.
For currency traders, this development should provide support for the pound sterling. A more hawkish Bank of England compared to the European Central Bank could fuel strength in the GBP/EUR cross. We believe long positions in the pound against the euro, possibly structured through options to manage risk, are now more compelling.
The implications for UK equity indices are more nuanced. A robust domestic economy is a clear positive for the earnings of FTSE 250 companies. However, the prospect of interest rates remaining higher for longer could cap gains for the more internationally-focused FTSE 100, which has already climbed over 7% since the start of the year.
What We Watch Next
Over the next few weeks, we will be watching for confirmation of this economic strength. The upcoming retail sales and purchasing managers’ index (PMI) data will be critical. Any further positive surprises will reinforce the view that the Bank of England will remain on hold, solidifying these trading perspectives.
