US Jobs Data Will Trigger Pound Versus Euro, Dollar Moves

07.07.23: US Jobs Data will Trigger Another Surge in Volatility for Sterling and Euro Against the Dollar

There were mixed elements in the latest US jobs data released on Thursday, but the surge in ADP payrolls inevitably grabbed the headlines.

The rebound in US services was also a significant element that suggested resilience in the US economy.

In this context, there were fresh doubts about whether the US economy would be able to achieve a controlled landing.

Fears also increased that the Federal Reserve will have to be even more aggressive in raising interest rates to trigger enough slack in the labour market and bring inflation in the services sector under control.

Fears over higher interest rates will continue to undermine risk appetite in the near term, especially with unease over the Chinese outlook.

At this stage, there are expectations that the Federal Reserve, ECB and Bank of England will all adopt aggressive monetary policies with further increases in interest rates.

These expectations have tended to dampen the potential for substantial moves in exchange rates.

There will, however, be sharp moves in exchange rates if there is evidence that any central bank is backing away from the current stance or is determined to push back against elevated market expectations.

Pound US Dollar Exchange Rate Outlook

The Pound to Dollar (GBP/USD) exchange rate was subjected to choppy trading on Thursday and was broadly resilient.

After a surge to 1.2780, GBP/USD slumped to lows at 1.2675 after the US jobs data, but regained the 1.2700 level alter in the session.

UK yields moved higher again on Thursday with the 2-year yield trading close to 15-year highs just below the 5.50% level.

High yields will remain a key element, especially with Bank of England rate expectations continuing to move higher.

Overall risk conditions will also be an important element and equity markets will be watched closely given the Pound’s sensitivity to risk appetite.

In this context, the slide in the FTSE 100 index to an 8-month low will be a significant concern.

Comments from the Bank of England will be watched closely given the recent jump in market expectations. MPC member Mann is due to make comments on Friday.

There will inevitably be choppy trading after the US jobs data with GBP/USD resilient while UK yields remain elevated.

Euro (EUR) Exchange Rates Today

The Euro to Dollar (EUR/USD) exchange rate attacked the 1.0900 level ahead of Thursday’s New York open with the German factory orders data providing an element of relief.

EUR/USD dipped sharply to below 1.0850 after the US ADP jobs data, but there was buying on dips, especially with a jump in German 2-year yields to the highest level since 2008.

EUR/USD traded just below 1.0900 on Friday.

Higher yields will underpin the Euro, but there will still be important reservations surrounding the Euro-Zone economy while Chinese vulnerability will also tend to sap currency support.

The developments in peripheral bond markets such as Italy and Spain will also be watched closely.

Any signs of substantial selling would risk a wider slide in confidence surrounding the Euro.

At this stage, EUR/USD should be resilient but needs to break above 1.0900 to gain traction.

US Dollar (USD) Exchange Rates Outlook

The US ADP data reported a surge in private payrolls of 497,000 for June compared with expectations of around 225,000 and following a revised 267,000 increase the previous month.

The ISM non-manufacturing index recovered strongly to 53.9 for June from 50.3 previously and above consensus forecasts of 51.0. there was a strong rebound in business activity with new orders increasing at a faster rate.

Employment was reported to have increased after a reported decline for May. There was, however, a retreat in the prices index with the lowest reading since May 2020.

US initial jobless claims increased to 248,000 in the latest week from a revised 236,000 previously and slightly above consensus forecasts of 245,000.

JOLTS job openings declined to an annual rate of 9.82mn for May from a revised 10.32mn previously.

The dollar surged higher following the ADP jobs data with the currency index posting 3-week highs.

US yields also jumped higher after the data, although there was only a limited change in pricing surrounding Federal Reserve interest rates given that markets were already extremely confident that rates would be increased in July.

The other data also suggested that the labour market was cooling.

Friday’s employment report will be another important piece of evidence.

Commonwealth Bank of Australia strategist Carol Kong commented; “The strong (U.S.) data boosted market expectations for a second FOMC rate hike, which previously wasn’t considered as possible.

She added; “Those data points suggest tonight’s payrolls and perhaps the average earnings data (could) beat the consensus estimate again, and if we do get another strong result, that could firm the dollar further.”

Other Currencies

There has been further yen volatility over the past 24 hours with sharp moves across asset classes.

The Pound to Yen (GBP/JPY) exchange rate found support at 182.50 before testing 15-year highs at the 184.00 level. Weaker equities triggered a fresh slide to 182.80 with the pair around 183.20 on Friday.

The Pound to Swiss franc (GBP/CHF) exchange rate posted 2-week highs just above 1.1450 before a slide to 1.1380 as equities slumped, recovering to trade around 1.1415 on Friday.

Weaker equities and fears over the global economy undermined the Australian dollar.

The Pound to Australian dollar (GBP/AUD) strengthened to near 1.9240 and close to 3-year highs before a limited retreat to just below 1.9200.

The Pound to Canadian dollar (GBP/CAD) exchange rate posted 2-month highs at 1.7035 before a marginal correction.

The Pound to New Zealand dollar (GBP/NZD) exchange rate also jumped to near 2.0700 before a retreat to 2.0640.

Weaker risk appetite also undermined the Swedish krona with the Pound to krona (GBP/SEK) exchange rate posting a fresh record high fractionally below 14.00 before a limited retreat to 13.91.

The Day Ahead

As far as the US jobs report is concerned, consensus forecasts are for an increase in non-farm payrolls of around 225,000 after a 339,000 gain last month.

The unemployment rate is expected to edge lower to 3.6% from 3.7% with a 0.3% increase in average earnings for the month.

After the shock ADP data on Thursday, markets will be expecting that the data will be stronger than the forecast number.

Canada will also release the latest employment report.

Market expectations are for an employment increase of close to 20,000 with the unemployment rate edging higher to 5.3% from 5.2%.

The overall moves in bond and equity markets will continue to be a major drive for currency markets.

Markets will still be on alert for intervention to support the yen by the Bank of Japan.