Rising unemployment in Britain is putting pressure on the pound and interest rate expectations
British financial markets saw significant movements this morning, with the pound sterling falling and government bond yields declining, in response to recent economic data revealing a slowdown in the UK labor market. These movements come as investors await the Bank of England's next monetary policy decision.
Unemployment figures and declining employment
Official data showed that the UK unemployment rate rose to 5.2% in December 2025, compared to 5.1% in the previous November, marking its highest level since January 2021. This rise indicates increasing challenges facing the British labor market after a period of stability.
According to a report published by CNBC and reviewed by Al Arabiya Business, payroll data showed a 0.4% year-on-year decrease in the number of employees on payrolls. The total number of employees reached approximately 30.3 million in January 2026, representing a decrease of 134,000 employees compared to January 2025, and a decline of 11,000 employees compared to the previous month, reflecting a clear slowdown in employment growth.
Market and currency reactions
This data was immediately reflected in the currency market, with the British pound falling 0.2% to $1.359. Conversely, stock markets reacted positively to the prospect of monetary policy easing, with the FTSE 100 in London rising by approximately 0.5% after the opening bell.
On the European front, markets remained stable, with the Stoxx 600 index holding above the breakeven line, while Italy’s FTSE MIB index rose by about 0.4%, France’s CAC 40 increased by 0.2%, and Germany’s DAX rose by 0.1%.
Bond yields and interest rate expectations
The release of weak jobs data boosted demand for UK government bonds (gilts), pushing their yields down. Ten-year gilts fell by 3 basis points to 4.368% , while two-year gilts dropped by 2 basis points to 3.563%.
This data reinforces the market's view that the Bank of England may continue cutting interest rates this year to support the economy. Current forecasts indicate a 75% of another rate cut next month, as slowing wage growth and rising unemployment are seen as signs of easing inflationary pressures, giving the central bank more room to relax monetary policy.
