During the US session on Monday, September 2, the British pound (GBP) maintained slight gains to reach 1.314, as US markets were closed for Labor Day, which led to significantly lower trading volumes, even lower than usual on Mondays. However, the UK market had to deal with the S&P Global/CIPS Manufacturing Purchasing Managers’ Index (PMI), which recorded an increase in line with expectations to reach 52.5. Meanwhile, the US Dollar Index (DXY), which measures the value of the dollar against a basket of six major currencies, is still recovering from the large sell-off it saw more than a week ago.
Strong US economic data helped boost the US dollar last week, which could mitigate the expected interest rate cut by the US Federal Reserve in September, as the cut is likely to be limited to just 25 basis points. With more US PMI and jobs reports due later this week, it will be important to follow these data to determine the size of the expected rate cut next week. Daily Market Movers: Very Slow Start
S&P Global released its August manufacturing PMI, which came in at 52.5, unchanged from the previous month.
As for the Bank of England, markets are not expecting a rate cut at its September 19 meeting, while analysis indicates an 87.2% chance that the bank will cut rates by 25 basis points at its November 7 meeting.
The benchmark US 10-year Treasury note rate was unchanged at 3.90% on Monday due to the US bank holiday.
The UK 10-year Treasury note rate was at 4.06%, up from a close of 4.01% on Friday.
European markets face further losses, with European stocks down more than 1% on the day, while the UK’s FTSE 100 index showed smaller losses, around 0.5%.
Economic data impact on the pound and dollar this week
Markets are bracing for a batch of economic data that could have a significant impact on the pound versus the US dollar exchange rate this week. With investors awaiting new releases from the US and the UK, markets could see significant volatility if these data show unexpected readings.
US will release its latest PMI data, which could lead to a significant price movement if the results are contrary to expectations. New job openings data for July will also be released, which could put pressure on the US dollar on Wednesday if it shows a decline in the number of new jobs.
In addition, US factory orders data will also be released on Wednesday, September 4, and is expected to show a slight increase. Will this increase strengthen the value of the US dollar?
Bank of America estimates that the pound could reach $1.41 by the end of the year. This forecast comes amid the possibility of tightening in the British labor market, which could prompt the Bank of England to adopt a less hawkish monetary policy.
In this context, the Bank of England appears to be heading towards easing monetary policy, but it is expected to be at a gradual pace given the resilience of the British economy. There is a one-in-four chance of another cut by the BOE in September.
UK manufacturing purchasing managers’ index, which tracks activity in the sector, showed signs of a recovery, hitting a 26-month high last month. Data provider S&P Global reported that the recovery in production, new orders and employment continued in August, raising the index to 52.5, compared to 52.1 in July, which is in line with initial estimates.
The Bank of England is expected to keep its base interest rate at 5% at its meeting on September 19.
Pound Sterling faces challenges from Fed chief’s comments and UK budget
The pound (GBP) opened the week with a distinct weakness amid a lack of macroeconomic data that left the British currency without a clear direction. While the positive impact of economic data was absent, UK Prime Minister Keir Starmer gave a speech on Tuesday in which he addressed the upcoming challenges in the budget, indicating that they could be “painful”. Although the pound initially shrugged off Starmer’s comments, it began to retreat as the week progressed, as markets began to absorb the warning contained in his speech.
With increasing focus on Chancellor Rachel Reeves’ Autumn Budget, the weak sentiment in sterling continued, with the British currency remaining under negative pressure. However, the pound saw a slight bounce at the end of the week, closing above most of its peers thanks to the recovery of risk trading.
US Dollar Falls on Fed Comments
The US dollar suffered a significant negative impact at the start of the week from Federal Reserve Chairman Jerome Powell’s remarks at the Jackson Hole Symposium on Friday, where Powell confirmed market expectations of a possible interest rate cut in September. This resulted in a significant decline in the value of the dollar, reaching its lowest levels in several months and two years against several major currencies.
As the week progressed, the US dollar sentiment began to improve, with some analysts beginning to speculate that the dollar could enter an oversold state. The CME Fedwatch tool indicates a 69% chance of a 25-basis point rate cut in September, compared to a 31% chance of a 50-basis point cut. There is also a 48.9% chance of another 25-basis point cut in November if the September cut is 25 basis points, while 42% of analysts expect a 75-basis point cut from current levels.
