US Payrolls Data Crucial For Pound Sterling Against Euro, Dollar

01.09.23: US Payrolls Data Crucial for Near-Term Sterling and Euro Moves Against the Dollar

The near-term market moves across all asset classes will be dominated by the latest US employment report on Friday, especially as the Fed considers that a softer labour-market will be crucial in bringing inflation under control.

As far as the labour-market is concerned, consensus forecasts are for an increase in non-farm payrolls of around 170,000 from 187,000 the previous month.

The unemployment rate is forecast to remain at 3.5% with average hourly earnings increasing 0.3% from 0.4% previously with the year-on-year increase holding at 4.4%.

Weaker than expected data would reinforce expectations that US interest rates have peaked with the Federal Reserve able to resist further rate hikes.

Stronger than expected data, however, would trigger fresh speculation that rates will need to move higher.

This would underpin the dollar, especially as equities would be liable to slide and trigger defensive demand for the US currency.

There is an important risk that initial moves will be reversed, especially with position adjustment.

The data on average earnings will be a key element in the data even if the payrolls data triggers the initial reaction.

Developments in China will remain an important underlying market influence.

China announced a cut in reserve requirement ratios for forex holdings on Friday which will help underpin the yuan and the latest business confidence data was slightly better than expected.

There are still important reservations surrounding the overall Chinese outlook which will also hamper confidence in the global economy and stifle risk appetite, but Beijing is likely to continue to announce measures to underpin the economy.

Pound US Dollar Exchange Rate Outlook

There were no major UK data releases on Thursday.

Bank of England Chief economist Pill warned that there was no room for complacency over inflation, although he added that there was also a risk that monetary policy will be tightened too much.

At this stage, markets still expect a further rate hike to 5.50% in September.

The Pound overall held relatively steady with dollar moves dominating.

The Pound to Dollar (GBP/USD) exchange rate dipped to lows around 1.2660 and was unable to regain ground on Friday with a dip below 1.2650.

The US data will be very important on Friday and there will also be pre-weekend position adjustment. Trends in equity markets will also be important for the Pound.

Very strong data would risk a GBP/USD slide towards 1.2500 with a potential move to 1.2750 if there is a notably weak US release.

Euro (EUR) Exchange Rates Today

The headline Euro-Zone CPI inflation rate was unchanged at 5.3% for August and slightly above consensus forecasts of 5.1%.

The core rate declined to 5.3% from 5.5% which was in line with market expectations.

The data overall was close to expectations, but the decline in the core rate triggered a dip in expectations surrounding a further ECB rate hike in September, especially as there had been some speculation that the rate would be higher than expected.

Markets priced in around a 30% chance of a rate hike from 50% previously and the Euro lost ground.

ECB council member Schnabel also commented that the recent data had deteriorated.

Ray Attrill, head of foreign-exchange strategy at National Australia Bank commented; “There’s a little bit of relief there, (which) had an impact in just dampening expectations for a September ECB hike. That’s basically what took the bite out of the euro.”

The Euro to Dollar (EUR/USD) exchange rate dipped to below 1.0850.

The stronger than expected Chinese Caixin PMI manufacturing data failed to provide a lift for the single currency and EUR/USD traded below 1.0850 on Friday with a move to 1.0830.

Expectations of a less hawkish ECB stance will continue to hamper the Euro in the short term.

In this context, EUR/USD will be at risk of a slide to 10-week lows below 1.0770 if the US data is much stronger than expected with notably weak jobs and wages data needed to spark a fresh move towards 1.0950.

US Dollar (USD) Exchange Rates Outlook

US initial jobless claims declined to a 4-week low of 228,000 for the latest week from 232,000 previously and below consensus forecasts of 235,000.

Continuing claims increased to 1.73mn from 1.70mn.

The annual core PCE prices rate edged higher to 4.2% from 4.1% which was in line with market expectations.

The data overall failed to provide ammunition for further dollar selling with the dollar index recovering to 103.30 from 102.70 lows.

The dollar will be vulnerable if the data is notably weaker than expected while there will be notable short covering and gains if the data is stronger than expected.

Trends in bonds markets and yields will be important with markets also watching whether there is a shift in pricing for a November rate hike.

At this stage, the chances of a rate increase are seen at close to 40%.

According to Sean Callow, senior currency strategist at Westpac; “The dollar rally is looking quite tired, with outsized falls in response to what are normally second-tier data releases, raising the danger of a dramatic fall if the first-tier payrolls number is soft.”

Other Currencies

The Japanese yen regained some ground on Friday as the Finance Ministry warned over excessive yen moves.

The Pound to Yen (GBP/JPY) exchange rate dipped to near 184.00 before a rebound to 184.40.

The Pound overall was mixed during the day with a net correction after gains on Wednesday.

Oil prices hit 3-week highs which helped underpin the Canadian dollar. The Pound to Canadian dollar (GBP/CAD) exchange rate retreated to 1.7100 before settling around 1.7115.

The Pound to Australian dollar (GBP/AUD) exchange rate settled around 1.9575.

There was a recovery in New Zealand consumer confidence, but it remained very weak in historic terms.

The Pound to New Zealand dollar (GBP/NZD) exchange rate dipped to 2.1180 before a recovery to 2.1260.

The Day Ahead

As well as the jobs data, the US will also release the ISM manufacturing data.

The ISM business confidence data is an important indicator with expectations that the index will remain in contraction territory below 50.0 for the 10th successive month with only a slight recovery to 46.9 from 46.4 previously.

Position adjustment will be important ahead of the weekend, especially with the US Labor Day holiday on Monday.

Chinese developments will also continue to be watched closely over the weekend.