UK unemployment rises. Rate cut expectations jump. GBP reacts. Markets are shifting as softer labour data strengthens the case for earlier Bank of England easing — and with inflation data due, volatility risk is elevated.
Key Highlight
- Sterling weakens following disappointing employment data
- Inflation figures now take centre stage
Market Recap
Trading conditions were fairly muted at the start of the week, with liquidity thinner than usual due to the US observing Presidents’ Day and parts of Asia also operating on holiday schedules. As a result, price action across major markets remained contained.
GBP Reaction
Sterling edged lower as UK government bond yields softened. This followed comments from Bank of England policymaker Catherine Mann, who characterised the UK economy as “sluggish” and highlighted that households are still feeling the after-effects of elevated inflation.
Her remarks reinforced expectations that the Bank of England may begin cutting interest rates sooner rather than later — potentially as early as next month. Markets are now pricing in close to 50 basis points of rate reductions over the course of this year, slightly more than was anticipated at the end of last week.
Market Overview:
UK: Labour Market Softens
This morning’s UK employment data pointed to a cooling jobs market. Unemployment ticked up to 5.2%, wage growth eased, and broader indicators suggest labour demand is gradually weakening.
Although private sector pay growth is still slightly above levels typically aligned with the Bank of England’s 2% inflation target, it continues to trend lower and remains broadly within forecast ranges. When combined with softer inflation expectations and the Bank’s increasingly cautious tone, markets are becoming more confident that rate cuts could begin sooner rather than later.
The probability of a March rate reduction has now risen to over 80%, up from around 75% yesterday. As a result, sterling has started the day under pressure.
What this means: Growing confidence in earlier rate cuts is reducing yield support for GBP. With UK inflation data due tomorrow, further weakness in price pressures would likely cement expectations of policy easing and could weigh further on the currency.
Eurozone: Focus on German Sentiment
Attention now turns to Germany’s February ZEW survey. Expectations are for an improvement in investor confidence, alongside a modest stabilisation in current conditions.
What this means: If sentiment rebounds more strongly than forecast, it could provide short-term support to the euro by reinforcing signs that Europe’s largest economy is showing resilience.
Canada: Inflation in Focus
Canadian CPI data is due later today and will be key for rate expectations. Markets are looking for confirmation that inflation continues to cool gradually.
- A softer reading would strengthen the case for additional Bank of Canada rate cuts this year, potentially weighing on CAD.
- A firmer print could reduce expectations of near-term easing and offer the currency some support.
With multiple inflation releases in play, volatility across GBP, EUR and CAD pairs could increase in the near term. Planning around these data points remains key for businesses with upcoming currency exposure.
17th February 2026
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