US, Euro-Zone Data Crucial To Pound Sterling Vs Dollar, Euro

31.08.23: US and Euro-Zone Data Releases will Continue to Drive Sterling Moves Against the Dollar and Euro

The weaker-than-expected US jobs data on Wednesday reinforced expectations that the US labour market is cooling.

There was also increased optimism that the Federal Reserve would not have to increase interest rates further which helped underpin risk appetite.

Gains in equities were, however, limited and the dollar recovered from intra-day lows.

Even if a further increase in US interest rates is avoided, there will still be expectations that the Fed will look to maintain a restrictive policy. The central bank will also not want a substantial easing in financial conditions in the near term as it wants to keep the focus on inflation fighting.

In this context, the US data will need to be notably weaker than expected to provide further momentum for dollar selling and gains in equities.

There will also be further reservations surrounding the Chinese and Euro-Zone economic outlooks with markets still needing attractive alternatives to justify aggressive dollar selling.

Socgen strategist Kit Juckes commented; “If a weaker dollar is only likely when the signs of slower growth are clear, a stronger euro is only likely when the current gloom about the economy eases.”

Pound US Dollar Exchange Rate Outlook

The Pound overall struggled to make headway in early Europe on Wednesday, but gradually gained traction during the day.

The Pound to Dollar (GBP/USD) exchange rate posted a strong advance to near 1.2750 after the US data. GBP/USD consolidated around 1.2715 on Thursday.

Overall risk appetite held firm and the dip in US yields was also an important element in underpinning the UK currency.

The Lloyds Bank business confidence index strengthened to an 18-month high for August which will help underpin Pound sentiment.

Comments from Bank of England chief economist Pill will be monitored on Thursday.

At this stage, although markets are confident that there will be a further rate hike in September, expectations surrounding peak rates remains in a state of flux.

There will be scope for further limited GBP/USD gains if the US data is softer than expected, but domestic and global reservations will tend to cap any gains.

Euro (EUR) Exchange Rates Today

The headline German CPI inflation rate declined to 6.1% for August from 6.2% previously, but slightly above consensus forecasts of 6.0%.

Markets expect around a 50% chance that the ECB will increase interest rates again at the September policy meeting which provided an element of Euro support.

After edging higher into the US open, the Euro to Dollar (EUR/USD) exchange rate jumped after the US data with an advance to 2-week highs just below 1.0950 before settling around 1.0915.

The Euro-Zone inflation data will be released on Thursday.

The headline rate is expected to decline to 5.1% from 5.3% with a retreat in the core rate to 5.3% from 5.5%.

Stronger than expected data would increase expectations of a September rate hike with markets currently pricing in around a 50% chance of a further rate hike.

Stronger inflation data would tend to support the Euro, although there will also be important reservations surrounding the Euro-Zone economy.

Overall, EUR/USD will need higher Euro-Zone inflation and weak US data to challenge 1.1000.

US Dollar (USD) Exchange Rates Outlook

US ADP data recorded an increase in private-sector payrolls of 177,000 for August after a downwardly-revised increase of 312,000 the previous month and below consensus forecasts of close to 200,000.

There was a further slowdown in the rate of wages growth with the annual increase at 5.9% from 6.2% the previous month and the lowest reading since October 2021.

Although there are reservations surrounding the reliability of the data, reported slowdown in jobs growth fed into the narrative that the labour market is cooling.

There was, therefore, a further slight shift in expectations surrounding Federal Reserve policy with the chances of a further rate increase edging further below 50%.

The dollar dipped to 2-week lows after the data before a tentative recovery as equity markets failed to hold intra-day highs.

US data releases will continue to be watched very closely.

The jobless claims data will provide further evidence on the labour market. Consensus forecasts are for an increase to 237,000 from 230,000 previously

There is also an important inflation reading with the PCE prices data. The core PCE inflation rate is forecast to edge higher to 4.2% from 4.1% previously.

If the data is weaker than expected, there will be further optimism that interest rates have peaked which will tend to undermine the dollar.

According to HSBC; “The challenge for USD bulls is that a USD extension higher requires the US exceptionalism narrative to be sustained, but now a lot is in the price. It leaves the USD especially vulnerable to any data disappointments.”

The bank is reluctant to forecast a sharp decline given vulnerabilities elsewhere. It adds; “Still, a toppish USD does not mean a broad reversal lower is imminent. We expect the fortunes for the rest of G10 FX are likely to be mixed in the coming weeks.”

Other Currencies

The Chinese PMI business confidence data had little net impact and commodity currencies were unable to hold intra-day highs.

The Pound overall was able to make gains on most crosses.

After a slide to 2-week lows at 1.9480, the Pound to Australian dollar (GBP/AUD) exchange rate recovered to 1.9620.

There was a recovery in New Zealand business confidence to a 2-year high of –3.7 for August from –13.1 previously.

The Pound to New Zealand dollar (GBP/NZD) exchange rate also recovered from 2-week lows around 2.1165 to trade around 2.1340.

The Pound to Canadian dollar (GBP/CAD) exchange rate hit 1-week highs near 1.7250 before settling around 1.7215.

The Pound to Yen (GBP/JPY) exchange rate hit 1-week highs at 186.00 before a retreat to 185.60.

The Pound to Swiss franc (GBP/CHF) exchange rate also recovered to 1.1170.

The Day Ahead

The US labour-market data and latest inflation reading will be important on Thursday.

Comments from Federal Reserve officials will be watched closely, especially if the US data is again weaker than expected.

Overall moves in equity markets will remain a key influence during the day.

There will be month-end position adjustment during the day, increasing the risk of choppy trading.