Sterling remains stable against the euro and US dollar after UK employment and wage growth slow, reducing pressure on the Bank of England to raise rates. Upcoming inflation data could shift expectations for future monetary policy
The Pound Sterling maintained a narrow trading range against both the euro and the US dollar following the latest UK labour market figures, which showed further signs of cooling in employment and private-sector wage growth. This moderation in jobs data has reinforced the view that the Bank of England is unlikely to raise interest rates in the near term, with market attention now turning to upcoming inflation figures for further policy signals.
On Tuesday, the Office for National Statistics reported that the UK unemployment rate held steady at 4.9% in the three months to June, defying expectations for a slight decline. Employment increased by 83,000 over the same period, well below the consensus forecast of 129,000 and marking the weakest rise in five months. Job vacancies fell to 707,000 in the three months to July, the lowest level since 2021 and, outside the pandemic period, the weakest since late 2014. Private-sector regular pay growth slowed to 2.8% in the second quarter, the softest pace since late 2020, while overall regular earnings growth edged up to 3.5%, supported by public sector pay awards. The number of payrolled employees continued to drift lower, indicating a gradual easing in labour demand.
Exchange Rates and Market Reaction
Following the release of the jobs data, the pound showed little movement against the euro, with the GBP/EUR rate at 1.169003, down 0.06% on the day. Against the US dollar, the pound slipped 0.13% to 1.353279, while the euro traded at 1.157635 to the dollar, down 0.07%. These modest changes reflected a market consensus that the Bank of England is unlikely to tighten policy further this year, even as some pricing for rate increases remains for 2026. Gilt yields were largely unchanged, and UK equities opened flat, with broader investor focus shifting to oil prices and geopolitical developments in the Middle East.
Private-sector wage growth matched the Bank of England's recent forecasts, and the continued decline in vacancies and subdued employment gains suggest that domestic inflation pressures remain contained for now. Most policymakers are expected to keep rates on hold at the next meeting, though the central bank is monitoring whether higher energy costs-linked to ongoing tensions in the Middle East-could eventually feed through to wage settlements and broader price pressures.
Inflation Data in Focus
The outlook for the pound and for Bank of England policy could shift quickly with the release of the latest Consumer Price Index (CPI) figures, due on Wednesday. Headline CPI is expected to rise to 2.9%, a level that remains above the central bank's 2% target but is largely attributed to higher oil prices. The more closely watched core inflation measure is forecast to remain steady at 2.5%. Should core inflation surprise to the upside, it could raise concerns that energy costs are filtering into broader price categories, potentially prompting the Bank of England to consider renewed rate hikes and offering some support to Sterling.
Recent research from Exchange Rates UK highlights that the jobs market is no longer a significant driver of inflation, and that the bar for further rate increases remains high unless there is a sustained and sharp rise in energy prices. This view is echoed by ING, which expects the Bank of England to keep rates unchanged through 2026 and to consider rate cuts only from spring 2027, barring a major inflation shock.
Comparisons and Broader Context
While the pound has shown resilience in the face of softer domestic data, its direction remains sensitive to both domestic inflation trends and external factors such as global energy prices and geopolitical risks. For context, earlier this year, Sterling's performance was closely tied to expectations for UK jobs and inflation data, as discussed in our previous coverage of Sterling's moves against the US dollar. The current environment, however, is marked by a more cautious stance from the Bank of England and a market that is increasingly focused on inflation data as the key driver of policy and currency direction.
For the reporting period, the GBP/EUR rate stood at 1.169003, GBP/USD at 1.353279, and EUR/USD at 1.157635, with all three pairs showing minor declines of less than 0.15% on the day. The unemployment rate was unchanged at 4.9% for the three months to June, employment rose by 83,000, and private-sector regular pay growth slowed to 2.8% in the second quarter. Vacancies dropped to 707,000, the lowest since 2021 outside the pandemic period.
The Bank of England's approach to monetary policy is shaped by its dual mandate to maintain price stability and support economic growth. In practice, this means balancing the risks of inflation against the need to avoid unnecessary tightening that could weaken the labour market or slow the recovery. The central bank pays close attention to both headline and core inflation measures, as well as to wage growth and employment trends, to assess whether price pressures are likely to persist or fade. While energy prices can cause temporary spikes in inflation, policymakers typically look for evidence that such increases are feeding through to broader wage and price dynamics before adjusting interest rates. This cautious, data-driven approach helps explain why the Bank of England has so far resisted calls for further rate hikes despite inflation remaining above target.
