UK Unemployment Surges to 5.0% as Wage Growth Slows to 3.4% – Iran War Impact Hits Labour Market
Office for National Statistics data shows jobless rate rising above expectations as Middle East conflict weighs on hiring, with payrolls falling across retail and hospitality sectors
UK unemployment rose to 5.0% in the three months to March, beating expectations of 4.9%, while wage growth slowed to 3.4%, the weakest since 2020. The data captures the first month of the US-Iran conflict impact, signaling a softening labour market with major implications for Bank of England policy.
The UK unemployment rate climbed to 5.0% in the three months to March 2026, surpassing expectations of 4.9%, according to Office for National Statistics (ONS) data released Tuesday morning. The increase marks the highest jobless rate in nearly five years and captures the early impact of the US-Iran conflict on Britain's labour market.
Wage Growth Hits Four-Year Low
Average weekly earnings excluding bonuses decelerated to 3.4% year-on-year, down from 3.6% in February and marking the slowest pace since November 2020. Including bonuses, wage growth held at 4.1%, slightly above the 3.8% expected but revised up from 3.8% previously to 3.9%.
The ONS attributed the wage slowdown to businesses cutting costs as Middle East tensions drove inflation expectations higher and squeezed profit margins. Elevated fuel prices from the Iranian blockade of the Strait of Hormuz fed through to household budgets and business expenses almost immediately in March.
ONS Director of Economic Statistics Liz McKeown said the data "suggests the labour market remains soft," with vacancies at a five-year low and unemployment trending higher year-on-year.
Employment Falls 100,000 in April
The number of payrolled employees dropped by 100,000 in April alone, a 0.3% monthly decline that brought total payrolled employment to 30.2 million. The hospitality, retail, and wholesale sectors saw the sharpest job losses, reflecting weaker consumer demand and rising input costs.
Job vacancies continued their downward trajectory, falling to a five-year low as businesses delayed hiring amid geopolitical and economic uncertainty. Youth unemployment among 16-24 year olds remained elevated near 16%, with entry-level roles in retail and hospitality particularly scarce.
Suren Thiru, Chief Economist at the Institute of Chartered Accountants in England and Wales (ICAEW), warned: "These figures signal a growing distress within the UK's labour market as soaring labour costs and the fallout from the Iran war drive more businesses to reduce recruitment and limit pay awards."
Bank of England Policy Implications
The deteriorating labour data complicates the Bank of England's policy calculus. While slowing wage growth offers relief on inflation pressures, rising unemployment signals economic weakness that could justify pausing interest rate hikes.
Markets currently expect the BoE to hold rates at 3.75% at its June 18 meeting, with traders pricing in a 62% probability of no change. However, if inflation accelerates above 4% later this year as forecast, the central bank may face the uncomfortable choice between fighting price pressures and supporting a weakening economy.
The Chartered Institute of Personnel and Development (CIPD) reported employer confidence near record lows this week, with firms prioritizing cost control over investment. Pay settlements are expected to average around 3.0% going forward, below projected inflation rates.
GBP Reaction and Technical Outlook
GBP/USD dipped 0.15% to 1.3505 following the data release, testing critical support at the 1.35 level. Traders are watching whether the pair can hold above this psychological threshold or if further weakness toward 1.3450 is likely.
Sterling's performance remains caught between the UK's relatively resilient economic growth—posting 0.6% GDP expansion in Q1 2026—and mounting headwinds from Middle East tensions and a slowing labour market.
Against the euro, EUR/GBP edged higher to 0.8520, while GBP/JPY fell to 214.50 as the yen benefited from risk-off flows.
Looking Ahead: Inflation Data Wednesday
Wednesday's April CPI release will be critical for sterling direction. Economists expect headline inflation to ease to 3.0% from 3.2%, but any upside surprise could reignite rate hike speculation despite labour market softness.
Work & Pensions Secretary Pat McFadden called the figures "encouraging" despite the unemployment rise, noting that 416,000 more people were employed versus a year earlier. However, the trajectory points to continued deterioration if geopolitical tensions persist.
For forex traders, the GBP/USD pair faces a critical test at 1.35 support. A break below could open the door to 1.3450 and 1.3400, while a bounce would need to reclaim 1.3550 to stabilize near-term sentiment.
Key levels to watch:
- GBP/USD support: 1.3500, 1.3450
- GBP/USD resistance: 1.3550, 1.3600
- EUR/GBP resistance: 0.8550, 0.8600
Jesus Guzman
Founder & Lead Analyst
Jesus is the founder of FN Pulse and a veteran trader with over 15 years of experience in financial markets. He specializes in quantitative analysis and is passionate about bringing transparency and data-driven insights to the retail trading industry.