UK jobs data boosts BoE rate rise bets, lifting British Pound against Euro

• Stronger-than-forecast UK employment figures lift the British Pound.
• A BoE interest rate increase at the 5 November meeting carries a 95% probability in market pricing.
• Political uncertainty limits the Euro’s support from expectations of additional ECB tightening.

Better-than-forecast UK labour market figures bolster Pound Sterling (GBP), pushing EUR/GBP down 0.38% on Tuesday. The cross is trading near 0.8395 at the time of writing, a level not seen since 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, meanwhile, grew by 3.7% year on year. That exceeded both the 3.6% forecast and the previous figure, which was revised upwards to 3.6%.

With the labour market proving stronger, the Bank of England (BoE) has greater scope to tackle energy-led inflationary pressures arising from the war in the Middle East. So far this year, the central bank has left interest rates at 3.75%.

Following the UK’s 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.”

In BBH’s assessment, the case for less tightening than markets currently price rests on several factors: “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,” suggesting that the central bank may ultimately raise rates by less than anticipated.

Mounting social unrest in France, Italy and other European countries is fuelling concerns about fiscal stability and political uncertainty, keeping the Euro (EUR) under pressure. The European Central Bank (ECB), meanwhile, has already increased interest rates twice this year in response to inflationary pressures caused by higher oil prices. With inflation still exceeding its 2% target, markets anticipate additional monetary tightening.

Although Commerzbank economists recognise that “core inflation in the euro area is currently rising only slowly,” they emphasise that closer examination reveals 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 that have faced elevated energy costs “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 consequently 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.”