Sterling Falls as Rising Unemployment and Slower Wage Growth Fuel Rate Cut Expectations

Sterling weakened on Tuesday after fresh labour market data showed Britain’s unemployment rate climbed to a five year high while wage growth continued to slow, reinforcing expectations that the Bank of England could move closer to cutting interest rates.

The pound fell around 0.55 percent against the dollar, slipping to approximately 1.3555 dollars in afternoon trading after standing higher earlier in the session. It also declined against the euro, reflecting broader currency market reactions to the softer economic figures.

Official data revealed that the unemployment rate rose to 5.2 percent in the fourth quarter of 2025, up from 5.1 percent in the previous three month period. Excluding the pandemic spike, this marks the highest level since 2015. The figures suggest a gradual cooling in the labour market after a prolonged period of tight conditions.

Wage growth showed further signs of easing. Annual regular pay growth, excluding bonuses, slowed to 4.2 percent in the three months to December compared with 4.4 percent in the previous reading. Private sector wage growth, closely watched by policymakers as a gauge of underlying inflation pressures, eased to 3.4 percent from 3.6 percent.

For the Bank of England, the combination of rising unemployment and moderating pay growth is significant. Policymakers have been seeking clearer evidence that wage driven inflation is subsiding before loosening monetary policy. Softer labour market data strengthens the case for a rate cut at the central bank’s next meeting in March.

Markets responded by increasing expectations of near term policy easing. Traders are widely anticipating at least one rate reduction in the coming months, with some forecasting further cuts later in the year. Lower interest rate expectations tend to weigh on a currency because they reduce the relative return on assets denominated in that currency.

Earlier this month, the Bank of England kept its benchmark rate at 3.75 percent, though more members of the Monetary Policy Committee voted for a cut than analysts had predicted. That shift in voting patterns was interpreted as a sign that the debate within the central bank is moving towards easing.

Investors are also awaiting upcoming inflation data, which could provide further direction for policy. Forecasts suggest that headline inflation may have slowed in January compared with December. The Bank expects price growth to move closer to its 2 percent target in the coming months, supported by changes in regulated energy prices and fiscal measures outlined in the government’s autumn budget.

Despite Tuesday’s decline, sterling has posted modest gains against the dollar since the start of the year. The currency has been supported in part by relative economic resilience in the UK and ongoing uncertainty surrounding US economic policy. However, the latest labour market figures have shifted short term focus back to domestic monetary policy prospects.