The British pound declined with the opening of the European market on Thursday against a basket of major currencies, resuming its losses after a brief pause against the US dollar and nearing a two-month low, amid concerns that UK labor market data may reinforce signs of an economic recession.

The unexpected rise in core inflation levels in the UK for June renewed inflationary pressures on Bank of England policymakers, leading to a decline in expectations of a British rate cut in August.

The Price

GBP/USD today: The pound dropped 0.3% to (1.3384$), down from the opening price of (1.3421$), after recording a session high at (1.3428$).

On Wednesday, the pound rose 0.25% against the dollar its first gain in nine sessions as part of a rebound from a two-month low at 1.3365$.

UK Inflation

The Office for National Statistics said on Wednesday that the UKs headline inflation rate rose 3.6% year-on-year in June, above market expectations for a 3.4% increase, and up from 3.4% in May.

Core inflation rose 3.7% in June, also higher than the expected 3.5%, and up from 3.5% in May.

The unexpected jump in prices has renewed inflationary pressures on Bank of England policymakers and may slow the pace of policy easing and rate cuts in the second half of the year.

UK Interest Rates

Traders scaled back their bets on BoE rate cuts, now expecting less than 50 basis points of easing this year.

Market pricing for a 25-basis-point rate cut in August dropped from 80% to 65%.

Andrew Bailey

Bank of England Governor Andrew Bailey told The Times on Monday that the direction of interest rates is certainly downward. In the interview, he signaled that the Bank would accelerate its rate-cutting pace if further signs of slack emerged in the economy.

Slack refers to an economic condition where the economy is not operating at full capacity, characterized by rising unemployment and slowing output. This is considered disinflationary and would strengthen the central banks confidence in inflation falling to 2.0% by 2026, as currently projected.

UK Labor Market

The upcoming UK labor market report, due later today, is equally critical for the pound, as its expected to provide further signs of labor market weakness.

There are growing indications that the job tax imposed by Rachel Reeves is burdening the labor market, with more job losses likely.

Traders are also struggling with the chaotic nature of UK labor market statistics, with some survey components now deemed unreliable.

A weak jobs report would provide further evidence to the BoE that the economic recession is unfolding, warranting additional rate cuts.

And as FX markets refocus on relative interest rates, a faster pace of BoE easing would weigh heavily on the pound.