The Pound-Dollar Rate Rises to $1.335 as Jobs Data Reinforces November Rate-Hike Case
The Pound Sterling has risen against the US Dollar after firmer jobs data, while banks question how far UK rates can rise and what the Budget will deliver.
The Pound-to-Dollar exchange rate climbed to $1.3351 on Tuesday morning, up 0.32% from Monday’s close, after UK labour-market figures added support to expectations of a November interest-rate increase.
Unemployment fell to 4.7% in the three months to August, while annual regular pay growth edged up to 3.7%, according to the Wall Street Journal’s report on the data and Sterling’s reaction.
The release challenges the more cautious assumptions in the bank previews, but it does not settle the question of how many increases the economy can absorb.
Bank of America forecasts increases in November 2026 and February 2027, but joins Jefferies in questioning the larger tightening cycle priced before Tuesday’s figures.
The 28 October Budget will also test whether stronger activity can coexist with a credible plan to contain borrowing.
Better employment figures do not settle the full rate path
BofA had expected unemployment to hold at 4.9%, making Tuesday’s fall a stronger outcome than it had assumed when arguing for a November increase.
The bank already saw growth as sufficiently resilient to reduce the trade-off between tackling inflation and protecting activity.
Economists Sonali Punhani and Ruben Segura-Cayuela write: “AI related activities are helping the UK economy buffer the shock from the conflict. Our forecasts incorporate a slowdown of the economy later in the year and in early 2027 due to higher inflation and tightening of financial conditions.”
They see scope for a better outcome if that technology-related activity lasts, but remain wary of extrapolating current strength into a prolonged hiking cycle.
“But overall, the passthrough of the shock to core inflation is likely to be relatively contained which implies that we continue to view market pricing of close to four hikes as excessive. We expect hikes in November and February to 4.25%.”
That assessment preceded the jobs release.
Jefferies’ Christopher Wood also doubted that roughly 100 basis points of tightening would materialise, citing the weak employment record rather than dismissing the energy-driven inflation threat.
Tuesday’s figures improve that picture, but vacancies continued falling, to 691,000, the Financial Times reports, with smaller businesses citing high labour costs.
A lower unemployment rate therefore does not mean employers have regained a strong appetite to hire.
For Sterling, a November increase and a sustained yield advantage are different propositions, particularly if investors later pare back expectations for subsequent rises.
The UK Budget forecasts still require higher taxes
The banks’ fiscal projections broadly agree on the need for additional revenue, although their estimates of the buffer against the government’s rules differ.
BofA anticipates near-term energy support and a higher borrowing requirement than projected in March.
Punhani and Segura-Cayuela write: “Overall we expect tax rises worth £8bn (0.3% of GDP) by 2029-30 to be announced to partially restore the post-measures headroom to £17bn (down from £23.6bn in March).”
“Higher yields, Bank Rate expectations, inflation along weaker growth and potential migration downgrades are likely to lower the headroom and raise borrowing. These pressures should be partly offset by stronger asset prices and faster wage growth.”
Morgan Stanley’s chief European economist, Jens Eisenschmidt, is more positive about the UK’s gradual fiscal consolidation relative to peers, while recognising that rising debt and debt-service costs leave work to do.
In sales commentary summarising Eisenschmidt’s research, Morgan Stanley’s Nick Savone writes: “Jens sees the Budget as an important test, with £5B-£10B of potential revenue measures needed to restore £15B of fiscal headroom, depending on spending decisions.”
“Despite challenging debt-service costs and future spending pressures, he remains constructive on the UK’s gradual consolidation path relative to peers.”
The wage figures are relevant to both sides of this debate: stronger earnings can sustain inflation pressure but also improve the tax base.
The Institute for Fiscal Studies’ fiscal analysis emphasises how sensitive revenue forecasts are to assumptions about earnings, while warning that higher inflation erodes departmental spending power.
BofA currency strategist Kamal Sharma expects the immediate fiscal event to be manageable: “All in all, our economists think that the Government will deliver a cautious Budget and adhere to the Fiscal Rules. Tougher decisions await but this is for 2027 and not the here and now.”
Bearish positioning leaves room for a further rebound
Crédit Agricole finds that investors were still heavily positioned against Sterling before Tuesday’s improvement in the data.
Strategists Valentin Marinov and Alexandre Dolci write: “The GBP remains the largest short in the G10 FX following extra selling interest last week, predominantly driven by IMM flows.”
“Our FX flow data points at hedge funds and real money investors inflows, as well as banks and corporates outflows. All in all, the GBP remains in oversold territory.”
That leaves scope for investors closing bearish positions to support the Pound if the news continues to beat expectations, although positioning alone cannot establish a lasting recovery.
BofA retains $1.37 for end-2026 and $1.45 for September 2027 in its currency projections, continuing the medium-term Sterling recovery case outlined earlier this month.
Before the Budget, the next test is Wednesday’s inflation release.
BofA expects headline inflation to rise to 3.5%, with a pickup in services inflation that would reinforce its November hike call if realised.
GBP/USD Exchange Rates FAQ
What is BofA’s GBP/USD forecast?
BofA retains $1.37 for end-2026 and $1.45 for September 2027. These are continuing projections, rather than a new upgrade after the jobs figures.
Does stronger employment mean four BoE rate rises?
It strengthens the near-term case, but BofA expects only two increases, in November 2026 and February 2027. Falling vacancies remain a caution against assuming a strong hiring recovery.
Have the Budget tax increases been announced?
No. The figures discussed are bank forecasts ahead of the 28 October Budget, and depend partly on spending decisions.
