The Pound Sterling (GBP) gains against its major peers at the start of the week. The British currency rises even though investors are worried about the growing risks of stagflation in the United Kingdom (UK) economy. Friday’s S&P Global UK Purchasing Managers Index (PMI) report for January showed that employment levels dropped for the fourth straight month and cost pressures accelerated in the private sector, a scenario that leads to higher inflation as producers pass on the impact of higher input costs to customers.

A slowdown in labor demand appears to be the outcome of Chancellor of the Exchequer Rachel Reeves’ announcement of increasing employers’ contribution to National Insurance (NI). 

The first indicators of business conditions in 2025 add to the gloom about the UK economy, with companies cutting employment amid falling sales and concerns about business prospects. Inflation pressures have, meanwhile, reignited, pointing to a stagflationary environment, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said.

Deteriorating job market conditions and rising price pressures are expected to add more troubles for the Bank of England (BoE), which is scheduled to announce its first monetary policy decision of 2025 on February 6. Traders are confident that the BoE will reduce interest rates by 25 basis points (bps) to 4.5%. 

Meanwhile, firm BoE dovish bets have also weighed on yields on UK 30-year gilts, down over 1% to near 5.15% on Monday.

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