In late June 2025, two seemingly unrelated developments underscored how policymakers were being forced onto the back foot by fast-moving economic and political pressure. Bank of England Governor Andrew Bailey warned that slack was opening up in Britain's labour market, strengthening the case for further interest rate cuts, while Canada abruptly scrapped its digital services tax to salvage collapsing trade talks with Washington. Together, the two events illustrated the delicate balancing act facing policymakers on both sides of the Atlantic.

Bailey Flags a Cooling UK Labour Market

Speaking at the British Chambers of Commerce Global Annual Conference on 26 June 2025, Bailey said "the evidence that slack is opening up has strengthened, especially in the labour market." He pointed to HMRC real-time data showing payrolled employees had fallen for seven consecutive months, with monthly declines exceeding 100,000 in some periods and a 0.4% drop over the three months to May. Bailey argued that a wider margin of slack would support continued disinflation, while stressing a "very gradual and very careful" approach to further cuts. He also noted that sticky wage growth had been a significant factor behind the Bank's decision to hold rates higher for longer than many had expected earlier in the year, and said the Monetary Policy Committee was watching signs of a rapidly softening labour market "very closely."

Ottawa's Rapid Reversal on the Digital Services Tax

Canada's finance ministry announced late on 29 June 2025 that it would rescind its 3% digital services tax, just a day before the first payments from major US technology firms were due. The reversal came after President Trump said he was "terminating ALL discussions on Trade with Canada" in response to the levy, which had targeted revenue tech companies earned from Canadian users. Prime Minister Mark Carney and Trump subsequently agreed to resume negotiations with the aim of reaching a broader deal by 21 July 2025, removing an immediate flashpoint in the relationship.

Why Both Moves Reflect Growing Policy Pressure

Bailey's comments came against a backdrop of subdued UK growth and hiring intentions that had softened across multiple survey measures, giving the Bank room to argue that a looser labour market would help pull inflation back toward its 2% target without reigniting price pressures. Canada's about-turn reflected simpler arithmetic: the tax risked a full rupture in a trading relationship worth hundreds of billions of dollars annually, at a moment when Ottawa could not afford an extended halt to talks with its largest trading partner.

Market and Currency Implications

Sterling initially firmed after Bailey's speech before softening as investors raised the odds of an August Bank Rate cut, weighing on the pound against the euro and dollar in the following sessions. The Canadian dollar found some support as the immediate threat of a trade rupture receded, even though negotiators still faced a tight three-week window to strike a deal. Both moves reinforced how sensitive G10 currencies remain to central bank rhetoric and trade headlines, often overriding scheduled data releases for short stretches. Options markets also saw a pickup in implied volatility for both sterling and the loonie in the days that followed, as traders hedged against the risk of further surprises from either the Bank of England or the ongoing US-Canada negotiations.

Daily market analysis by BCM Markets.