UK Unemployment Rate Climbs to 5.2%, Triggering Sharp Pound Decline
The UK unemployment rate for individuals aged 16 and over has surged to 5.2% during the period from October to December 2025, marking the highest level since 2021. This significant increase has exerted immediate pressure on the value of the Pound Sterling, which fell sharply in response to the concerning labour market data.
Official Data Reveals Labour Market Weakness
According to official statistics released this morning, the unemployment figure represents a rise compared to the previous quarter and exceeds estimates from a year ago. The early estimate for payrolled employees in January 2026 shows a decrease of 134,000 (0.4%) year-on-year, with a monthly drop of 11,000, bringing the total to 30.3 million.
This contraction in payroll numbers reflects weak hiring activity, as noted by Liz McKeown, Director of Economic Statistics at the Office for National Statistics (ONS). McKeown stated, "The number of workers on payroll fell further in the final quarter of the year, reflecting weak hiring activity, although it is largely unchanged in the latest month."
Sterling Falls Against Major Currencies
The labour market pressures led to Sterling declining by 0.3% against the US dollar to 1.359 and by 0.2% against the euro to 1.147 on Tuesday morning. Economists attribute this currency weakness to the cooling labour market, which is prompting traders to reassess expectations for UK interest rates.
Grant Slade, an economist at Morningstar, explained to the Daily Express, "The weakening of the pound reflects today's labour force data points, which point to a further cooling in the labour market - as evidenced by both the further contraction in HMRC payrolls in January and a further deceleration in wage inflation in December."
Slade added, "Traders are reassessing the medium-term outlook for UK interest rates, with sterling weakness reflecting rising expectations for a greater degree of monetary easing from the Bank of England."
Rising Unemployment and Wage Growth Slowdown
The ONS data indicates that the increase in the unemployment rate is partly due to more individuals who were previously out of work now actively seeking employment. Meanwhile, the number of vacancies has remained broadly stable since mid-last year, leading to a higher ratio of unemployed people per vacancy, which has reached a new post-pandemic peak.
Redundancies are also trending upward, adding to the labour market challenges. In terms of wages, private sector wage growth has slowed to its lowest rate in five years, while public sector pay growth has also decelerated, though it remains elevated due to earlier pay awards implemented in 2025.
McKeown commented, "Private sector wage growth continues to slow and is at its lowest rate in five years. Public sector pay growth also slowed in the latest period but remains elevated, still affected by some pay awards being implemented earlier in 2025 than 2024, although this effect has now started to diminish."
This combination of rising unemployment, falling payroll numbers, and slowing wage growth paints a picture of a cooling UK economy, with immediate repercussions for the Pound's value in international markets.
