UK Labor Market Weakens, BoE Rate Cut Bets Build as Sterling Dips

UK Labor Market Weakness Lifts BoE Rate Cut Bets

The UK labor market sent mixed signals, triggering market bets on a Bank of England (BoE) interest rate cut in Q4.

The UK unemployment rate increased from 4.7% in July to 4.8% in August, potentially cooling wage growth. A weaker labor market could curb consumer spending, dampening demand-driven inflation.

However, average hourly earnings (including bonuses) accelerated, rising 5% YoY in the three months to August, up from 4.7% in July. Rising wages risk fueling inflationary pressures, complicating the BoE’s path to rate cuts.

The Office for National Statistics revealed key insights into the UK labor market:

• The number of payrolled UK employees declined by 10,000 month-on-month in August and by 93,000 between August 2024 and August 2025.
• Early estimates of payrolled employees for September 2025 signaled a fall in employment, with 10,000 fewer payrolled employees.
• Job vacancies declined by 9,000 from August 2025 to September 2025, marking the 39th consecutive monthly decline.
• The claimant count increased in September, but decreased year-on-year to 1.692 million.

Rising Wages and Inflation Clash with Higher Unemployment

August’s labor market data followed sticky inflation numbers, challenging expectations of further BoE monetary policy easing in the fourth quarter. The annual inflation rate remained at 3.8% in August, holding well above the BoE’s 2% target.

Furthermore, rising wages in July fueled consumer spending in August. Higher wages signaled a potential uptick in demand-driven inflation. Retail sales increased 0.5% in August, matching July’s retail sales trend.

Commenting on recent data and policy outlook, BoE MPC member Sarah Greene stated:

“I think that our monetary policy stance is still restrictive, and so I do think that Bank Rate is still on a downward path. But it’s less restrictive than it had been, and that’s a concern if you consider that inflation has been ticking up for the past year.”

Greene’s comments reinforced expectations that rate cuts may not come this year.

Economists Downplay Chances of a Q4 BoE Rate Cut

Ahead of today’s labor market data, ING economists shifted away from expectations of a November BoE rate cut, stating:

“We no longer expect another Bank of England rate cut this year, though lower inflation and higher taxes should unlock further easing in 2026.”

ING economists expect further monetary policy easing in February, more dovish than market bets on an April rate cut, stating:

“We’ve taken out a November cut, but December is possible. However, we narrowly favor February for the next move, on the basis that headline inflation should be a little lower at the start of next year. In total, we expect three rate cuts in 2026.”

GBP/USD could gain traction as markets bet on Fed rate cuts in October and December and a BoE cut in April. The US-UK interest rate differential could shift in favor of the Pound if this scenario plays out. US interest rates would drop to 3.75%, while UK rates would remain at 4%, potentially sending GBP/USD higher.

Markets responded swiftly, putting sterling under pressure amid rising unemployment.

GBP/USD Dips After Labor Market Data

Ahead of the labor market report, GBP/USD fell to $1.33227 before briefly rebounding to $1.33521. After the release, the pair rose to $1.33409 before falling to a low of $1.33075. On Tuesday, October 14, the GBP/USD was down 0.18% to $1.33079. Initial market reaction to rising wages and higher unemployment suggested traders increased dovish BoE bets.

While labor market data may have raised Q4 rate cut hopes, upcoming UK economic indicators could be crucial for GBP/USD trends.

Which reports do traders need to look out for?

UK GDP data (October 16) and inflation figures (October 22) will influence the BoE rate path. Meanwhile, retail sales and Services PMI data (October 24) will face scrutiny as investors consider the effects of inflation on consumption and, crucially, the services sector.

Rising bets on a December rate cut may pressure GBP/USD toward $1.3250, while stronger data and a hawkish BoE could drive a rebound toward $1.35.

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