Lloyds Bank Financial Research Hub

Recent research from Lloyds Bank highlights a cooling UK labour market, evidenced by a -100k decline in April payrolls and a rise in the unemployment rate to 5.0%. This easing of labour tightness, characterized by slowing private sector pay growth to 3.0%, is expected to provide the Bank of England with greater policy flexibility. While UK GDP grew by a solid 0.6% in the first quarter of 2026, analysts warn of a slowdown to 0.1% in Q2 due to rising energy prices and geopolitical uncertainty. Fixed income markets have responded to these cooling signals, with 10-year gilt yields dropping below 5% following softer inflation data and contractionary PMI readings. In foreign exchange, the bank maintains a neutral bias on GBP/USD and EUR/USD, noting that the US Dollar has found temporary support from AI-related equity trades despite broader structural shifts. Collectively, the data suggests that while domestic sectors like construction show resilience, the combination of slowing growth and eased inflation supports a cautious 'hold' position for monetary policy.