UK Labor Market Weakens, Adding Pressure on BoE to Ease; GBP/USD Dips Below $1.34

UK Jobs Data Fuels Rate Cut Bets Despite Inflation Bump

Did the UK labor market data revive hopes of an August Bank of England rate cut?

The UK unemployment rate climbed to 4.7% in May, up from 4.6% in April. Rising unemployment may soften wage growth, potentially dampening consumer spending and demand-driven inflation. A softer inflation outlook could raise expectations of a BoE rate cut.

Meanwhile, wage growth slowed in May, also suggesting a potential pullback in consumer spending. Average hourly earnings (including bonuses) rose 5% in the three months to May year-on-year, softer than April’s 5.4% increase.

The Office for National Statistics provided crucial insights into the UK labor market:

• The number of payrolled UK employees declined by 25,000 month-on-month in May and by 135,000 between May 2024 and May 2025.
• Early estimates of payrolled employees for June 2025 signaled a fall in employment, with 41,000 fewer payrolled employees.
• Job vacancies declined by 56,000 from March 2025 to June 2025, marking the 36th consecutive period of decline.
• The claimant count increased in June and on a year-on-year basis to 1.743 million.

 

Wage Growth and Unemployment Signal Softer Inflation Outlook

May’s softer wage growth and rising unemployment could dampen consumer sentiment and spending. A pullback in consumer spending may dampen demand-driven inflation, supporting a more dovish BoE monetary policy stance.

However, June’s hotter-than-expected UK inflation numbers could delay a BoE rate cut beyond August. The annual inflation rate rose from 3.4% in May to 3.6% in June, well above the BoE’s 2% target, with services inflation holding steady at 4.7%. Nevertheless, the BoE could respond to deteriorating labor market conditions.

ING Economics commented on the June inflation report, stating:

“Services inflation is uncomfortably high for the Bank of England. That suggests some reluctance to speed up the pace of rate cuts, though Thursday’s jobs data is key. If that deteriorates further, policymakers have little choice but to move faster.”

GBP/USD Response to the UK Labor Market Data

Ahead of the UK labor market report, the GBP/USD briefly climbed to a high of $1.34218 before falling to a low of $1.33840.

After the release of the UK Labor Market Overview Report, the GBP/USD briefly tumbled to a low of $1.33808 before recovering.

On Thursday, July 17, the GBP/USD was down 0.24% to $1.33873. The initial market reaction to softer wages and a rising unemployment rate suggested traders expect a more dovish BoE stance. However, June’s inflation figures have fueled BoE policy uncertainty, leading to the swift rebound.

While the latest data may raise uncertainty about an August BoE rate cut, upcoming UK economic indicators will provide traders further clues on the BoE rate path.

UK Services PMI (July 24) and retail sales (July 25) will draw interest ahead of the August 7 interest rate decision.

Rising expectations of multiple BoE rate cuts could push the GBP/USD pair toward the $1.30 level. Conversely, stronger data and delays to BoE policy easing may send the pair toward $1.35.

Stay informed here on upcoming BoE decisions, macro trends, and their impact on GBP forecasts.