Why Strong UK Jobs Data Failed To Help The British Pound

The Pound Sterling weakened against the US Dollar after the Bank of England signalled little urgency to tighten policy further, despite stronger-than-expected employment data and lingering inflation risks.

With oil prices easing following the signing of a US-Iran peace framework, markets increasingly believe the BoE can afford to stay on hold for an extended period, limiting support for Sterling.

Pound Sterling Slips as BoE Likely on Prolonged Rate Hold

This week’s data showed some resilience in employment. The data was better than expected.

However, the BoE seemed in no rush to hike rates, and with a peace deal now signed, oil prices are easing.

Sterling fell against a strong dollar, talking GBPUSD down to 1.32.

Thursday was a busy day for UK markets as traders had to contend with both the release of key employment statistics followed later by the Bank of England rate decision meeting. The former showed the UK economy remains resilient. Employment increased by 100,000 in the three months to April, beating expectations of around 75,000 and marking a solid gain compared with recent softer readings. The unemployment rate fell to 4.9% from 5.0%, contrary to forecasts that it would hold steady or tick higher.

Other details in the release paint a more mixed picture. Job vacancies continued to decline, dropping to around 707,000, the lowest level since early 2021 outside the pandemic period. Payroll employment showed some weakness in monthly figures, with signs of stabilisation after earlier drops. Wage growth remained moderate, with regular pay (excluding bonuses) up around 3.4% year-on-year in recent data. This is well below the peaks seen in previous years and suggests limited pressure on costs from the labour market.

The employment report paved the way for the BoE meeting later in the session, and suggested if the bank felt the need to hike rates to combat inflation, the economy was on a steady footing to shoulder that blow. However, the committee

kept the Bank Rate at 3.75% in a 7-2 vote. Two members preferred a 0.25 percentage point increase to 4.0%. The decision came as expected by markets and was therefore not a major driver across related markets. Governor Andrew Bailey has stressed the need for vigilance. In recent comments he said the path of the energy price shock remains “very uncertain” and that the Bank stands ready to act if second-round effects on inflation take hold. He added that tolerating temporarily above-target inflation can support the real economy given current softness, but that tolerance would weaken if wage and price pressures become embedded. That doesn’t seem the case, and with President Trump signing a peace deal MOU this week, oil prices have come down and the energy spike may be over.

Markets reacted with a modest sell-off in sterling. GBPUSD slipped around 0.7% toward the 1.32 area after the combined releases, extending recent weakness as the hold from the BoE removed any immediate hawkish potential. However, that move was partly a function of dollar strength and EURGBP was only slightly higher by 0.15%, and remained under 0.87.

Gilts found some support as investors priced in a central bank that remains data-dependent rather than rushing to respond to energy-driven inflation risks. Equity markets showed limited immediate reaction, with FTSE indices holding steady as the employment gain offered reassurance on underlying demand even as hiring indicators weakened.

Looking ahead, the BoE will watch the next inflation prints closely, especially any pass-through from energy costs. With inflation around 2.8% and expected to rise later in the year toward 3.25% in the Bank’s projections, policymakers have signalled they have room to wait. As ING noted, the bar is now high for rate hikes and the next move could be a cut next year.

“There’s nothing in today’s decision that changes our mind that the next move is likely to be a rate cut in 2027. It feels like it would take a lot for the five more neutral-to-dovish members of the nine-strong committee to vote for a hike, barring the Iran deal falling apart and energy prices moving materially higher.”