British Pound Sterling Falls After Strong Jobs Data as Stagflation Fears Return

The British pound sterling weakened against the dollar and the euro on Tuesday, even as the UK released a stronger-than-expected jobs report for the three months to February. The paradox highlights a growing market concern that the Bank of England may be forced to cut interest rates soon, despite a resilient labor market, as the broader economy shows signs of stagflation.

Jobs data beats expectations, but wage growth softens

The Office for National Statistics reported that the UK unemployment rate fell to 3.8% in the three months to February, down from 3.9% in the previous period and below the consensus forecast of 4.0%. Employment rose by 182,000, significantly above the expected 80,000 gain. However, average weekly earnings excluding bonuses grew by 5.6% year-on-year, slightly below the 5.7% forecast and down from 5.8% in January. The data suggests the labor market remains tight, but the pace of wage growth is cooling, which could ease some inflationary pressure.

Why did sterling sell off on good news?

Currency markets often trade on expectations rather than headlines. The initial knee-jerk reaction to the jobs report was a modest sterling rally, but the move reversed within an hour. Traders cited two main factors: first, the softer wage growth figure reduces the urgency for the Bank of England to hold rates high. Second, the broader UK economic narrative remains dominated by weak GDP growth and persistent services inflation. The combination of a tight labor market and sluggish growth is a classic stagflationary mix, which is negative for a currency because it complicates central bank policy. Markets are now pricing in a 60% probability of a BoE rate cut in June, up from 50% before the data release.

Market reaction and immediate implications

GBP/USD fell from a session high of 1.2550 to 1.2470 by mid-afternoon London time, a drop of 0.6%. Against the euro, sterling declined 0.4% to 0.8570. The FTSE 100, meanwhile, rose 0.3%, as domestically focused stocks benefited from the prospect of lower borrowing costs. The 10-year gilt yield fell 5 basis points to 4.12%, reflecting increased rate-cut expectations. For UK households, the pound’s weakness means imported goods become more expensive, potentially offsetting some of the disinflation from cooling wage growth.

Conclusion

The UK jobs report for February presented a contradictory picture: a strong headline employment number, but with underlying details that reinforced the market’s stagflation narrative. Sterling’s sell-off underscores that in the current environment, good news on jobs is not enough to support the currency if it comes alongside signs of economic weakness and a path toward lower rates. Traders will now focus on the March CPI release and the BoE’s May meeting for further direction.

FAQs

Q1: Why did the pound fall after a strong jobs report?
The market focused on softer wage growth and the broader stagflation narrative, increasing bets that the Bank of England will cut interest rates soon. Lower rates reduce a currency’s yield appeal.

Q2: What is stagflation, and why is it bad for a currency?
Stagflation is a combination of stagnant economic growth, high unemployment, and rising inflation. It is negative for a currency because it limits a central bank’s ability to use rate policy effectively—raising rates hurts growth, while cutting them fuels inflation.

Q3: When is the next Bank of England meeting?
The next Monetary Policy Committee meeting is scheduled for May 8, 2025. Markets will watch closely for any change in forward guidance.