Pound ticks higher after jobs data – United States

Written by Convera’s Market Insights team

Peak pound optimism?

George Vessey – Lead FX Strategist

The pound has gone from being the best performing G10 currency this year, to the worst in August, due to wavering global risk appetite and rising bets the Bank of England (BoE) will cut interest rates two more times this year. However, the BoE is seen as the least dovish versus its G3 peers and today’s mixed UK jobs report continues to muddy the policy outlook. Sterling has ticked higher though, grappling with $1.28 and €1.17 against the USD and EUR respectively this morning.

Britain’s economy created more jobs than expected in the three months to June, delivering a surprise drop in the unemployment rate from 4.4% to 4.2% and well below the consensus forecast of 4.5%. That said, wages rose at the slowest pace in almost two years, cooling from 5.8% to 5.4%, the latest sign of a cooling labour market. While the jobs figures have been distorted by problems with the labour market survey, the news on wages was very much in line with what officials would want to see, though rate expectations remain unmoved. Meanwhile, in the FX space, CFTC data shows that although they are still near multi-year highs, GBP longs were reduced by the most this year last week, having peaked three weeks back. Sterling remains in a vulnerable position for bulls to further trim bets amid a slew of important data which includes inflation (tomorrow) and preliminary GDP data (Thursday).

Inflation data on Wednesday is forecast to show consumer prices rose 2.3% in July from a year earlier after having converged to target in June, which won’t come as a surprise to the BoE. But core and services inflation, which are more closely watched, are expected to soften. Hence, overnight indexed swaps in the UK have been inclined to price nearly two rate cuts in the remainder of the year from the BoE.

Cause for caution

George Vessey – Lead FX Strategist

FX markets have experienced a turbulent summer due to increasing concerns about a more pronounced US economic slowdown and questions are being raised about whether the Federal Reserve (Fed) has maintained high interest rates for too long. However, with volatility indices mean reverting, bolstered by a positive ISM services report in the US last week, easing recession fears, risk appetite has firmed, supporting pro-cyclical FX and halting haven demand.

A US or global economic slowdown phase presents a complex scenario for global FX markets: a slowing economy from above-trend output typically pressures the US dollar, but a slowdown leading to a clearly negative output gap tends to support the dollar due to its safe-haven status. For now, stability in equity markets has led investors to adjust their expectations for the Fed’s September meeting, now anticipating a 25-basis point rate cut instead of the previously expected 50 basis point cut. Short-dated yields have stabilised above 4% and the US dollar index around the 103 handle. Overall, though, due to its weakening growth and yield appeal, this transition phase for the dollar introduces near-term downside risks for the US currency but does not necessarily overturn the current strong dollar regime, especially while structural factors such as protectionism/tariff risks and increased US fiscal stimulus, continue to play a supporting role.

Today, the focus is on NFIB small business optimism and US producer prices. Investors may breathe a sigh of relief if July’s headline and core PPI come in softer than June as expected. Meanwhile though, in the geopolitical space, the US believes an Iranian attack against Israel may come as soon as this week, which might restrict any risk rally and keep the safe haven dollar bid.

Euro directionless ahead of US CPI

Ruta Prieskienyte – Lead FX Strategist

Financial markets started the week calmly, with the European equity index, Stoxx50, ticking marginally higher on Monday, while the demand for government bonds eased further. The EUR/USD pair remained stable, fluctuating within a narrow range of $1.0915-$1.0935 as investors adopted a cautious approach ahead of the crucial US CPI report scheduled for later this week. Given the importance of this data release, volatility is expected to remain subdued leading up to the event.

Germany’s ZEW Economic Sentiment report for August is set to be released soon, and expectations are for a further deterioration, marking the second consecutive month of decline. The eurozone’s private sector growth stalled in July, with Germany acting as a significant drag on the region’s overall performance. The German economy is teetering on the edge of stagnation, especially after the unexpected contraction in the second quarter. If the ZEW report confirms a bleak outlook, it could reinforce concerns about Europe’s growth prospects. However, the impact on the euro may be limited, as investors are more likely to focus on US macroeconomic data for cues on the EUR/USD direction.

Additionally, geopolitical tensions, particularly the ongoing Russia-Ukraine conflict, remain a background concern for investors. The recent rise in European gas prices to €41.4 per megawatt-hour, a 9-month high, underscores the potential risks. Historical patterns from 2022 suggest that any significant increase in fossil fuel prices tends to benefit the US dollar, as it typically signals broader economic risks that drive investors toward safer assets like the greenback.

Pound rebounds against safe haven peers

Table: 7-day currency trends and trading ranges

Key global risk events

Calendar: August 12-16

All times are in BST

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.