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Sterling Weaker as Loosening Labor Market Favors Further Bank of England Rate Cuts, Says MUFG

BY MT Newswires | ECONOMIC | 12/16/25 07:08 AM EST

07:08 AM EST, 12/16/2025 (MT Newswires) -- Sterling (GBP) has weakened alongside the US dollar (USD) at the start of this week, resulting EUR/GBP rising back up closer to the 0.8800 level after hitting a low of 0.8721 of last Tuesday, said MUFG.

The bank expects sterling to weaken further as the Bank of England moves to lower rates on Thursday, stated MUFG. The relief rally for sterling after last month's Budget appears to have run its course now.

The recent softening of United Kingdom inflation, weaker growth and loosening of labor market conditions have provided justification for another BoE rate cut this week, and should be sufficient to encourage at least key swing voter Governor Andrew Bailey to shift in favor of a vote for another reduction this week, wrote the bank in a note.

The latest U.K. labor market report provided further evidence of loosening labor market conditions, pointed out MUFG. Payrolled employees fell by 38,000 in November. It was the largest monthly decline this year and takes the year-to-date drop to almost 154,000.

Loosening labor market conditions were also highlighted by the ongoing rise in the unemployment rate to a new cyclical high of 5.1%. It has risen by 1.0 percentage point in just over a year.

Loosening labor market conditions and softening inflation are helping to slow wage growth, added the bank. Private sector wage growth excluding the more volatile bonus component slowed to 3.9% three-month/year over year in October, down from 4.2% in September, although it was a little higher than the consensus forecast. It has been trending lower since the end of last year, when it was at 6.2% in December 2024.

The last potential banana skin for BoE rate cut expectations will be the release on Wednesday of the United Kingdom consumer price report for November, according to MUFG. A significant upside inflation surprise would be required to derail a rate cut this week, given slowing economic growth and loosening labor market conditions in the U.K.

MT Newswires does not provide investment advice. Unauthorized reproduction is strictly prohibited.

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