Why is the British Pound gaining against the Euro as UK jobs data bolsters BoE rate hike bets?

• The British Pound gains ground as UK employment figures beat market expectations.
• A BoE interest rate increase at the November 5 meeting carries a 95% probability in market pricing.
• Political uncertainty limits the support for the Euro from expectations of additional ECB tightening.

The Pound Sterling (GBP) gains support from stronger-than-forecast UK labour market figures, pushing EUR/GBP down 0.38% on Tuesday. Trading around 0.8395 at the time of writing, the cross is at levels last recorded in May 2025.

Employment increased by 102,000 in the three months to August, compared with a gain of 67,000 in the preceding period, according to the Office for National Statistics (ONS). In an unexpected decline, the unemployment rate dropped to 4.7%, the lowest since July 2025. Regular earnings excluding bonuses, meanwhile, grew by 3.7% YoY. This exceeded both the 3.6% forecast and the previous reading, which had been revised upwards to 3.6%.

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

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

Explaining why the central bank could eventually tighten less than markets currently price in, BBH states 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,” with all these factors pointing to a potentially smaller policy response.

Pressure persists on the Euro (EUR), with worsening social unrest in France, Italy and other European countries fuelling worries about fiscal stability and political uncertainty. To address inflationary pressures caused by higher oil prices, the European Central Bank (ECB) has already increased interest rates twice this year. Further tightening is reflected in market pricing, as inflation continues to exceed the central bank’s 2% target.

Although Commerzbank economists recognise that “core inflation in the euro area is currently rising only slowly,” they emphasise that a detailed examination of the figures reveals that “high energy prices are already pushing up the prices of goods and services.” In their assessment, that indirect impact will gather strength: “next year, this indirect effect… likely to intensify noticeably, causing the core rate to rise further.”

As businesses paying higher energy bills “for more than half a year… are now increasingly passing these costs on,” Commerzbank forecasts that “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 therefore anticipates upward revisions to the ECB’s projections, stating that “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.”