Blog By David Stritch, Senior Multicurrency Analyst, Caxton | October 20th 2026
UK unemployment fell unexpectedly to 4.7% in the three months to August, down from 4.9% and well below the 5.0% markets expected. The surprise strengthens the case for a Bank of England rate rise on 5 November and pushed GBP/USD up around 0.33% on the morning of 20 October, with tomorrow’s inflation data now the next big test.
Key takeaways
The Office for National Statistics (ONS) reported this morning that unemployment fell to 4.7% from 4.9% across the three months to August. Markets had expected a rise to 5.0%.
On the surface that’s a strong labour market report. Employment rose by around 102,000 over the period, regular pay growth (excluding bonuses) rose to 3.7%, and the more timely payroll data showed roughly 13,000 more people on payrolls between August and September.
Underneath, the picture is more mixed. Job vacancies fell by 21,000 to 691,000 in the three months to September, the lowest since 2021, with smaller businesses citing higher labour costs as a reason to hold back on hiring.
Not entirely, and that’s worth knowing before reading too much into one release.
A 0.2 percentage point fall in unemployment is a decent move. But set against a 102,000 rise in employment over the same three months, you might expect unemployment to have fallen by closer to 0.4 points. Something isn’t quite lining up.
The single-month figures are stranger still. They suggest unemployment dropped from 4.9% in July to 4.3% in August [CHECK: single-month figures], a fall that would need something like 200,000 new jobs in a single month. The ONS itself warns that single-month estimates are unreliable because they draw on roughly a third of the sample used for the headline rate. I’d treat them with real caution.
Pay is the other story. Public sector pay growth has topped 6%, while private sector wages are growing at just 3%. That gap is hard to sustain for long, either in the public finances or in what it signals about underlying wage pressure.
Because markets trade the headline, and the headline says the jobs market is tighter than feared. A tighter jobs market means more pressure on wages and prices, which makes a Bank of England rate rise more likely.
Higher interest rates tend to support a currency, because they increase the return on holding it. That’s why the pound rose this morning and why markets lifted their expectations for the Bank’s peak rate, now pricing a terminal rate (the highest point in the cycle) around 10 basis points higher by the end of 2027.
Context matters here. The Bank of England held Bank Rate at 3.75% on 17 September, but three of its nine policymakers voted to raise rates to 4%. Today’s data adds to the case those three were making.
GBP/USD opened at 1.3305 and traded around 1.3352 shortly after 8am on 20 October. The pound has not yet broken above the high it hit on 16 October, which would mark a full one-month high against the dollar.
Against the euro, GBP/EUR opened at 1.1866 this morning.
Inflation, starting tomorrow. The ONS publishes September consumer price inflation at 7am on Wednesday 21 October. Headline inflation is currently 3.1%, still well above the Bank’s 2% target.
A higher-than-expected print would further raise the odds of a November hike. A softer number would give the more cautious members of the Bank’s Monetary Policy Committee room to wait. After that, the Budget on 28 October and the Bank’s decision on 5 November round out a busy few weeks for sterling.
When a central bank decision is this finely balanced, the pound can swing sharply on each new data point. That cuts both ways.
My read is that the market is right to take today’s headline seriously, even if the detail is shakier than the number suggests. A labour market that refuses to weaken, paired with pay growth still running above inflation, is exactly what the Bank’s hawks have been warning about. If tomorrow’s inflation figure comes in hot, I think a November hike moves from likely to very hard to avoid. If it surprises lower, today’s rally could prove short-lived.
Will the Bank of England raise interest rates in November 2026?
Markets now see a rate rise on 5 November as likely, and today’s jobs data strengthens that view. Nothing is guaranteed, and tomorrow’s inflation figures could still shift expectations.
Why did the pound rise after the unemployment data?
Lower unemployment suggests stronger wage and price pressure, which makes higher interest rates more likely. Higher rates tend to make a currency more attractive to hold.
Are the UK unemployment figures reliable?
The three-month headline is the most reliable measure, though it has been volatile. The single-month figures are based on a much smaller sample and the ONS advises caution in using them.
When is the next UK inflation release?
The ONS publishes September inflation data at 7am on Wednesday 21 October 2026.
How can businesses protect against swings in the pound?
Common approaches include forward contracts to fix a rate for future payments and rate alerts to act when a target rate is reached. A multicurrency dealer can help you match the approach to your cash flow.
If you have payments or receipts in foreign currency over the coming weeks, it’s worth a conversation before the inflation data and the Bank of England decision move the market. Speak to one of Caxton’s multicurrency dealers about forward contracts and rate alerts that fit your timing, or check online for a live quote.
This article is for information only and does not constitute financial advice. Exchange rates can move quickly and past performance is not a guide to future performance.