Pound Sterling rose to trade near 1.3180 against the US dollar during the North American session on Thursday. The GBP/USD pair continues to build on Wednesday’s gains as weak US employment data for August added to signs of deteriorating labor market conditions. The unexpectedly weak payrolls data has led to a weaker US dollar, with the US Dollar Index (DXY), which measures the greenback’s value against six major currencies, falling to the crucial 101.00 support level.
Private sector employers added 99,000 jobs in August, missing expectations for a 145,000-gain compared to a revised 111,000 gain in August, revised from 122,000. Furthermore, the initial jobless claims data for the week ending August 30 came in below expectations, with the number of people filing for unemployment benefits for the first time coming in at 227,000, below the estimate of 230,000 and the previous figure of 232,000.
The appeal of US dollar was also negatively affected by the weak US job openings data for July, which showed a decline to 7.67 million jobs, the lowest level in more than three and a half years. These signs of a slowing labor market have reinforced expectations that the Federal Reserve may take steps to ease monetary policy more aggressively.
According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 50 basis points to 4.75% – 5.00% at the September meeting has risen to 47%.
In the near future, the US non-farm payrolls data for August, due on Friday, will remain the main catalyst for US dollar’s movements. The importance of US labor market data is gaining increasing attention as the Federal Reserve appears to be more focused on preventing job losses, with evidence continuing that inflationary pressures are on track to return sustainably to the bank’s 2% target.
Sterling gains strongly as UK economic outlook improves
The pound posted a strong performance on Thursday, gaining significantly against other major currencies. The rally was driven by an improvement in the UK economic outlook, which has changed market expectations that the Bank of England’s monetary policy easing cycle may be less deep this year than in previous cycles by central banks.
The S&P Global/CIPS Purchasing Managers’ Index (PMI) data, released on Wednesday, showed economic activity in the UK expanded at a faster pace in August. Activity rose at the fastest rate since April, driven mainly by strong expansion in the manufacturing and services sectors. This strong performance suggests that the UK economy is strengthening under current conditions.
Financial markets are looking for just one interest rate cut by the Bank of England for the rest of the year. The central bank began the process of normalizing monetary policy in August, and is expected to keep interest rates at 5% this month, with another cut likely in November or December. This wait suggests that any future decisions will depend on upcoming economic data and market developments.
The pound will continue to be influenced by market sentiment and speculation about a rate cut by the Bank of England, especially in the absence of significant UK economic data. Next week, investors will focus on employment data for the quarter ending in July, as well as monthly GDP data for July.
On Thursday, investors will also focus on the ISM services PMI for August, which is due to be published at 14:00 GMT. After making initial gains, the US dollar has seen its value decline on weak US labor market data, with the dollar index falling sharply from 101.70 to 101.25.
Sterling faces challenges despite positive data
The GBP/USD exchange rate found support at 1.3100, later rising to 1.3165 after the release of US data. Although the UK data showed an overall improvement, the risk-adverse conditions could weigh on the currency,, especially given the continued rise in long positions in the pound.
As for the GBP/EUR, it remained stable around 1.1870, without making any significant progress. The UK final services PMI for August was revised to 53.7, up from the preliminary reading of 53.3 and up from July’s reading of 52.5, reflecting a sustained expansion in activity.
“The pound could see a rise, but there is a greater risk of downside given the extension of existing positions,” noted Alex Gykov, Head of G10 FX Strategy at BNP Paribas. Meanwhile, Brad Bechtel, global head of FX at Jefferies, expects Friday’s US jobs data to drive sharp moves in the dollar.
The latest US JOLTS data showed job openings fell to 7.67 million in July, down from a downwardly revised 7.91 million in June, which was originally reported at 8.18 million. That was below the consensus forecast of 8.09 million and the lowest reading since April 2021, adding to evidence of a weak labor market.
After European markets close, the Federal Reserve’s Beige Book, which includes an assessment of economic conditions, will be released. The increased focus on weak employment in the Beige Book could help reinforce the perception that the likelihood of the Fed cutting rates by 50 basis points at its September 18 meeting is relatively low.
