The British pound has taken a hit, dropping against the euro, dollar, and other major currencies, following the revelation that the UK shed jobs in January and wages cooled notably. This development has sparked a surge in the odds of a Bank of England interest rate cut next month, as UK payrolls experienced an 11k decline in January, marking a fifth consecutive monthly drop. The unemployment rate, which rose to 5.2% in December, a five-year high, has disappointed expectations of a stable reading of 5.1%.
The Bank of England is closely monitoring the cooling wages, as it signals that disinflationary trends are tightening their grip on the economy. Average earnings, including bonuses, fell from 4.7% to 4.2%, falling short of expectations for a drop to 4.6%. Excluding bonuses, pay fell from 4.5% to 4.2%, meeting expectations. These data points indicate a growing slack in the jobs market, which should slow inflationary trends and open the door to a rate cut next month and potentially on two more occasions this year.
The rising bets on rate cuts are putting pressure on domestic bond yields and the pound. Kathleen Brooks, research director at XTB, notes, 'The market reaction has been swift. The pound has sunk on this news.' The GBP/EUR exchange rate fell to 1.1471, and the GBP/USD exchange rate fell to 1.3565. Paul Mackel, head of FX research at HSBC, warns that risks to GBP could build if the labor market deteriorates more than expected or if policy uncertainty returns. As the BoE cuts rates closer to neutral in 2026, he expects GBP to weaken versus G10 currencies whose policy rates are already neutral.
Jonathan Raymond, investment manager at Quilter Cheviot, attributes the hiring hold-ups to budget constraints, suggesting that the longer-term impacts of increased costs faced by businesses are yet to be fully realized. 'Increased minimum wage costs, national insurance contributions, business rates, and concerns around the impact of the Employment Rights Act continue to show up in the data and appear to be putting a weight on the economy,' he explains.
The ONS reports that the number of job vacancies has remained broadly stable since the middle of last year, but with rising unemployment, the number of unemployed people per vacancy has increased, reaching a new post-pandemic high. Redundancies are also on the rise, with Sanjay Raja, Chief UK Economist at Deutsche Bank, noting that rising employee costs have spurred a substitution from labor to capital. Youth unemployment hit a new high at 16.1% in the three months to December, and the share of workers outside the labor market who want a job remains elevated at 23% of the 16-64 aged economically inactive population.
The next test for sterling is the midweek release of UK inflation data, but it will require a surprisingly strong uptick in prices to shift the direction of travel in UK rates and currency. Derek Halpenny, Head of Research for Global Markets EMEA at MUFG Bank, predicts that the CPI data expected tomorrow will reinforce the view of a March rate cut and keep the pound under downward pressure.
