Sterling fell and British government bond yields declined on Tuesday after data showed the UK unemployment rate rose to its highest level in five years, reinforcing expectations that the Bank of England could begin cutting interest rates as early as next month.
The pound weakened 0.5 percent against the dollar to trade around $1.356, while slipping 0.2 percent against the euro, after official data showed the unemployment rate rose to 5.2 percent in December from 5.1 percent a month earlier. That marks the highest level since January 2021.
Figures from the Office for National Statistics also showed the number of payrolled employees fell by 0.4 percent year-on-year to 30.3 million in January 2026, representing 134,000 fewer workers than a year earlier and a decline of 11,000 from December.
“With Britain’s economy close to flatlining and the labour market weakening, the conditions for monetary easing are falling into place,” said Samuel Fuller, director of Financial Markets Online. “This is the weakest employment backdrop the Bank of England has faced since the pandemic recovery period.”
The soft labour data triggered a rally in UK government bonds. Yields on 10-year gilts fell nearly 4 basis points to 4.37 percent, while 30-year yields dropped about 4 basis points to 5.17 percent. Britain continues to have the highest long-term government borrowing costs among G7 economies, with both 20- and 30-year yields trading above the 5 percent percentmark.
Interest rate futures now fully price in two rate cuts by the Bank of England this year, with traders assigning roughly a 75 percent probability of a cut at the next policy meeting.
European equity markets were mixed. The pan-European STOXX 600 hovered near the flatline, while Germany’s DAX edged up 0.1 percent and Italy’s FTSE MIB gained 0.5 percent. France’s CAC 40 slipped slightly into negative territory in afternoon trading.
London’s FTSE 100 outperformed, rising 0.4 percent, helped by gains in heavyweight mining stocks and selective earnings optimism.
Among individual stocks, BHP Group rose nearly 1 percent after reporting stronger-than-expected first-half earnings and announcing a long-term silver streaming agreement with Wheaton Precious Metals, involving an upfront payment of US$4.3 billion.
Shares in Antofagasta fell sharply after earnings disappointed, while InterContinental Hotels Group also traded lower following its results.
Elsewhere, Germany’s annual inflation rate rose to 2.1 percent in January from 1.8 percent in December, according to the country’s statistics office, reinforcing expectations that the European Central Bank will proceed cautiously with any policy easing.
Global markets remained subdued as investors awaited further economic signals. U.S. stock futures were near flat after Wall Street posted two consecutive weekly declines, while several Asian markets were closed for Lunar New Year holidays, thinning trading volumes.
Analysts said sterling is likely to remain under pressure in the near term as weakening labour conditions and slowing wage growth strengthen the case for lower interest rates, narrowing the pound’s yield advantage against the dollar.
Performance of the pound sterling
Sterling’s weakness comes amid growing signs of strain in the U.K. labour market and a slowing economy. The latest data showing unemployment at a five-year high reinforces concerns that higher interest rates have cooled hiring, while softer wage growth suggests easing inflationary pressures. This combination strengthens expectations that the Bank of England may begin cutting interest rates sooner than previously anticipated to support growth.
At the same time, Britain faces structurally high borrowing costs, with gilt yields among the highest in the G7, reflecting persistent fiscal pressures and weak productivity growth. Although equity markets such as the FTSE 100 have remained relatively resilient helped by earnings from global-facing firms the currency remains sensitive to domestic economic data and shifting monetary policy expectations.
