The Paleocene-Eocene Thermal Maximum (PETM; ~ 56 million years ago) is the most severe carbon cycle perturbation event of the Cenozoic. Although the PETM is associated with warming in both the surface (up to 8°C) and deep ocean (up to 5°C), there are relatively few terrestrial temperature estimates from the onset of this interval. The associated response of the hydrological cycle during the PETM is also poorly constrained. Here, we use biomarker proxies (informed by models) to reconstruct temperature and hydrological change within the Cobham Lignite (UK) during the latest Paleocene and early PETM. Previous work at this site indicates warm terrestrial temperatures during the very latest Paleocene (ca. 22-26°C). However, biomarker temperature proxies imply cooling during the onset of the PETM (ca. 5-11°C cooling), inconsistent with other local, regional and global evidence. This coincides with an increase in pH (ca. 2 pH units with pH values > 7), enhanced waterlogging, a major reduction in fires and the development of areas of open water within a peatland environment. This profound change in hydrology and environment evidently biases biomarker temperature proxies, including the branched GDGT paleothermometer. This serves as a cautionary tale on the danger of attempting to interpret biomarker proxy records without a wider understanding of their environmental context.