UK jobs data bolsters BoE hike bets, lifting British Pound against Euro

• Stronger-than-forecast UK employment figures lift the British Pound.
• 95% odds of a BoE interest rate increase at the 5 November meeting are priced into markets.
• Political uncertainty limits the Euro’s support from expectations of additional ECB tightening.

EUR/GBP falls 0.38% on Tuesday. UK labour market figures exceeding forecasts have strengthened the Pound Sterling (GBP). The cross is trading near 0.8395 at the time of writing, a level last recorded in May 2025.

Employment increased by 102,000 in the three months to August, compared with 67,000 in the preceding period, according to the Office for National Statistics (ONS). An unexpected decline took the unemployment rate to 4.7%, the lowest since July 2025. Regular earnings excluding bonuses grew 3.7% YoY. That exceeded both the 3.6% forecast and the prior reading, which was revised upwards to 3.6%.

With labour market conditions stronger, the Bank of England (BoE) has greater scope to tackle energy-led inflation arising from the war in the Middle East. Interest rates have remained at 3.75% throughout this year so far.

Following the UK’s August labour market release, BBH strategists observe that “GBP is up against most major currencies”. They say the figures “reinforced the case for a BoE 25bps policy rate hike to 4.00% on November 5.” On market pricing, they note that “the swaps curve implies 95% odds of a November BoE rate hike and 100bps of tightening in the next twelve months,” while warning that, “in our view, the BoE may not need to tighten as much as markets anticipate, which is a headwind for GBP.”

Less tightening than markets currently price in may ultimately be warranted, according to BBH. Its reasoning is that “the UK economy is operating below capacity, the policy rate is near the top of the BoE’s estimated 2% to 4% neutral range, and fiscal policy will likely turn more restrictive following the October 28 UK budget,” factors that could constrain the central bank’s response.

Rising concerns about fiscal stability and political uncertainty continue to weigh on the Euro (EUR), as social unrest intensifies in France, Italy and other European countries. To address inflationary pressure from higher oil prices, the European Central Bank (ECB) has already increased interest rates twice this year. With inflation still exceeding its 2% target, markets anticipate additional tightening.

Although Commerzbank economists recognise that “core inflation in the euro area is currently rising only slowly,” they highlight underlying evidence that “high energy prices are already pushing up the prices of goods and services.” They expect this indirect impact to gather strength, arguing that “next year, this indirect effect… likely to intensify noticeably, causing the core rate to rise further.”

Companies facing higher energy bills “for more than half a year… are now increasingly passing these costs on,” Commerzbank says. As a result, “core inflation is expected to rise from its current level of 2.5% to over 3% by the fall of next year,” according to the bank. It also anticipates upward revisions to the ECB’s projections: “based on our current forecasts, the ECB is likely to raise its expectations again in December. This supports our expectation of an ECB interest rate hike in December.”