UK Labor Market Data and BoE Outlook: Balancing Inflation Risks with Economic Growth

The upcoming UK labor market data is expected to show a slight rise in unemployment and a modest increase in wage growth, with economists predicting a slowdown in pay momentum. Following the Bank of England’s recent decision to cut rates by 25 basis points to 4.75%, Governor Andrew Bailey stressed caution around further rate cuts due to inflation risks, particularly within the services sector.

Although the market assigns a low probability (around 20%) to a December rate cut, a dovish labor market print could increase expectations for earlier easing. However, the Bank is likely to place more weight on the two inflation reports due before December as it assesses inflationary pressures. The BoE remains focused on the persistence of services inflation and balancing support for economic growth with efforts to address inflation.

The BoE’s latest forecast suggests inflation may stay higher for longer, with a projection of 2.75% for 2025, up from the previous estimate of 2.25%. While the Bank’s stance remains cautious, soft labor data could suggest economic slowing, prompting markets to anticipate earlier rate cuts. A definitive shift in policy might still wait until February if inflation persists.

In the currency market, with the USD buoyed by recent Republican gains in the U.S., a significant miss in UK labor data could reinforce a short-term GBP/USD sell bias, as weak labor data would support a dovish outlook for UK rates.