The US dollar remains strong across major foreign exchange markets, with tariff uncertainty causing riskier trades to be sidelined. The British pound is similarly under pressure, particularly during Asian trading hours.

A recent report from the Confederation of British Industry revealed that profitability among business and professional firms has decreased to -37 in the last three months, a sharper decline than the -32 recorded previously and the steepest since August 2020.

Businesses are facing rising employment costs stemming from autumn budget measures, while demand conditions continue to be weak. Additionally, the pronounced decline in consumer services firms indicates a cautious attitude towards spending among households.

This suggests that traders should be prepared for continued weakness in confidence among businesses, which might weigh on broader economic sentiment. A downturn in business profits, particularly one that accelerates, often leads to reduced investment and hiring, which then filters through to wider market conditions. Given that business and professional services are integral to the UK economy, a contraction in this sector raises concerns about overall stability.

Employment costs are rising due to policy adjustments, which means firms are under greater pressure to manage finances carefully. When costs climb while demand remains subdued, companies look for ways to protect margins, often through scaling back recruitment or, in some cases, reducing headcount. This could have implications for household spending, particularly if job security becomes an issue. The timing is especially important as wage growth had previously supported consumption, but this influence may be fading.

Consumer caution is reflected in the services sector, which is experiencing an even sharper drop in confidence. This means people are more hesitant to commit to discretionary purchases, likely due to concerns over their own financial security. If this trend persists, traders should keep a close watch on retail and hospitality performance, as these are often early indicators of broader shifts in sentiment.

Meanwhile, the US dollar’s continued resilience is limiting risk appetite across markets. With tariffs creating uncertainty, more speculative positions are being avoided, which naturally lends support to safer assets. The pound remains under pressure, and overnight sessions in Asia continue to highlight its vulnerability. Movement during those hours is often driven by external developments rather than domestic factors, which means any sharp moves could set the tone for European trading.

In the coming weeks, attention should remain on data releases that provide insight into consumer behaviour and business sentiment. If profitability continues to deteriorate, pressure may build on policymakers to reconsider aspects of fiscal policy. However, as employment costs are already set to increase, any relief is unlikely to come quickly. For now, the focus remains on how businesses adapt to weaker demand and higher costs, as well as any signals that could shift expectations on future monetary or fiscal decisions.