04.08.23: US Jobs and Wages Data will Drive Near-Term Sterling and Euro Moves against the Dollar
The global economy and expectations surrounding monetary policies for major central banks will continue to be crucial in the short term. There will also be an inevitable focus on the Federal Reserve given global leadership and major financial-market implications.
The US data releases will, therefore, be watched very closely, especially given the impact on Federal Reserve policy.
In this context the US jobs data will be important with next week’s US consumer prices data also a crucial element.
There is strong evidence that inflation in the goods sector is not a significant problem at this stage.
Energy prices have, however, increased with oil prices close to 3-month highs.
The increase in oil prices will put some upward pressure on inflation and base effects will become less favourable later in the year. In this context, the decline in headline inflation will stall and then reverse.
There will also be concerns that inflation in the services sector will be more stubborn and prevent central banks from easing back on an aggressive monetary policy.
In this context, strong labour-market data would reinforce concerns that interest rates will have to stay higher for longer, increasing the risk that the US and Europe will slide into recession.
Pound US Dollar Exchange Rate Outlook
The Bank of England increased interest rates by 25 basis points to 5.25% at the latest policy meeting. This was the 14th successive rate hike and took rates to a 15-year high. The decision was in line with consensus forecasts, although a minority had expected a 50 basis-point hike.
Haskel and Mann voted for a 50 basis-point hike to act forcefully against inflation while Dhingra again voted for no change in rates due to the risk of tightening too far.
Headline inflation is expected to decline to 5% in the fourth quarter of this year, but there were notable concerns over core inflation.
The bank stated that policy is now restrictive and hinted that rates were close to a peak, but also warning over services-sector inflation with a particular focus on wages. It also suggested that higher interest rates would need to be maintained for longer.
The overall rhetoric was mixed, but expectations of peak UK rates were scaled back slightly and shorter-term yields declined.
The Pound to Dollar (GBP/USD) exchange rate extended losses and dipped sharply to 4-week lows below 1.2625.
UK yields recovered from lows and equities also attempted to rally with GBP/USD recovering to above 1.2700 to trade around 1.2720 on Friday.
The US data and risk conditions will remain important on Friday with GBP/USD vulnerable if there is strong US data and a fresh retreat in equities.
Comments from BoE chief economist Pill will also be monitored on Friday.
Given the net retreat in UK yields, GBP/USD will need relatively weak US data to make any short-term headway.
Euro (EUR) Exchange Rates Today
Overall confidence in the Euro-Zone outlook remained very fragile on Thursday and weaker risk conditions were also an important factor for the single currency.
The Euro to Dollar (EUR/USD) exchange rate dipped to fresh 3-week lows just below 1.0915 ahead of the US open before managing to stage a limited recovery to 1.0950 as the dollar retreated from intra-day highs.
The US jobs data and trends in risk appetite will be important for the Euro on Friday.
Chinese stimulus measures will also be an important element with a Euro boost if China pushes strong stimulus.
Overall, EUR/USD will need significant elements of US data weakness to make any progress toward the 1.10 level.
US Dollar (USD) Exchange Rates Outlook
The ISM non-manufacturing index retreated to 52.7 for July from 53.9 previously and slightly below consensus forecasts of 53.0. Employment increased only slightly for the month while prices increased at a slightly faster rate.
The data maintained expectations of a net slowdown in the economy, but the prices index reinforced concerns that inflation would be sticky in the services sector.
Overall risk conditions were important with the dollar gaining strong initial support amid weaker equities before a recovery as US equities attempted to recover.
Central bank stances will remain crucial. Thierry Wizman, global FX and currencies strategist at Macquarie in New York commented on the relative outlook; “It’s the European central banks that have offered more clarity about the peak in interest rates,” He added; “You would think that the disinflation story being more prominent in the U.S., that it would be the Fed signalling more clarity on the top in interest rates.”
The latest jobs data will be important in determining whether there is any change in the narrative.
Consensus forecasts are for an increase in non-farm payrolls of just above 200,000 with the unemployment rate expected to remain at 3.6%. Average hourly earnings are forecast to increase 0.3% on the month.
Strong data would increase pressure on the Federal Reserve to maintain a very restrictive monetary policy.
In contrast, a slowdown in jobs growth and evidence of increased labour supply would offer relief.
Risk trends for the dollar will also be a key element with defensive US currency demand if equities come under pressure.
The most likely outcome is that the dollar will make short-term headway if the data is stronger than expected.
Other Currencies
The Pound was subjected to volatile trading on Thursday with the impact of the Bank of England policy decision, amplified by fluctuations in risk appetite.
The Pound to Yen (GBP/JPY) exchange rate dipped sharply to lows at 180.40 before a recovery to 181.25.
The Pound to Australian dollar (GBP/USD) exchange rate briefly posted fresh 3-year highs near 1.9470 before a net retreat to 1.9370.
The Pound to New Zealand dollar (GBP/NZD) exchange rate hit lows at 2.0790 before a recovery to 2.0890.
There was very choppy trading in the Canadian currency with the Pound to Canadian dollar (GBP/CAD) exchange rate sliding to near 1.6870 before a recovery to 1.7000.
The Pound to Swiss franc (GBP/CHF) exchange rate briefly hit 3-month lows just above 1.1050 before a recovery to 1.1130.
The Day Ahead
The latest US jobs report will be very important on Friday.
Markets will be monitoring reactions in the bond and equity markets very closely given the important impact on currency markets.
There will also be position adjustment into the weekend which will maintain choppy trading conditions.
Chinese policy developments during the weekend will also be potentially important.
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