The pound ended last week on the front foot after a surprisingly weak US employment report undermined the dollar. US payrolls unexpectedly fell in July, the first outright decline in some time, against forecasts for a solid gain, and prior months were revised sharply lower. The dollar dropped on Friday and sterling firmed, although a quiet start to the week meant the pound was little changed over the five days as a whole.
The jobs data reshaped the outlook for US rates, reducing what little prospect remained of a further Federal Reserve hike and reinforcing expectations of a prolonged pause. Attention now turns to US inflation on Wednesday, the week’s key release, with UK growth figures on Thursday also in focus.
A shock US jobs report
Friday’s US employment report was the standout event. The economy unexpectedly shed 23,000 jobs in July, against expectations for a gain of around 80,000, marking the first outright monthly decline in some time. Adding to the soft picture, employment figures for May and June were revised down by a combined 103,000. The unemployment rate actually edged lower, to 4.1%, but for an unwelcome reason: the labour force participation rate fell to a multi-year low, so the drop reflected people leaving the workforce rather than a genuinely tighter jobs market.
What it means for the Fed
The report shifted the balance of risks around Federal Reserve policy. Having held rates in late July with three officials still pushing for a hike, the committee now faces clearer evidence of a cooling labour market. Markets pared the already-slim odds of a further rate rise and leaned towards a prolonged pause, with a growing view that the Fed can afford to sit still. The immediate reaction sent US yields and the dollar lower. Even so, several analysts cautioned that upcoming inflation data will matter more than a single soft jobs print in setting the Fed’s path.
A rangebound week despite the drama
Despite Friday’s sharp reaction, the dollar finished the week broadly flat, and both sterling and the euro were little changed over the five days. Currency markets have entered a calmer, more rangebound phase following a high-drama late July, when the joint Japan-US yen intervention, Middle East tensions and shifting Fed expectations drove large moves. Easing oil prices over the past fortnight have also helped cool inflation anxieties and steady yields.
Sterling and the euro
For GBPUSD, the near-term direction is being set by the dollar side of the equation, with the pair lifted on Friday but consolidating within its recent range. GBPEUR was steadier: both sterling and the euro gained against a softer dollar, leaving the cross broadly balanced rather than showing a clear directional move. With a light UK calendar early in the week, Wednesday’s US inflation reading is likely to be the more important driver for sterling against the dollar, ahead of UK growth data on Thursday.
The week ahead
- Tuesday: (UK) Average Earnings and ILO Unemployment Rate – GBPEUR; (US) NFIB Small Business Optimism – GBPUSD
- Wednesday: (US) CPI (Jul) – GBPUSD
- Thursday: (UK) GDP (Q2 Prel and Jun) – GBPUSD, GBPEUR; (EU) Eurozone Q2 GDP (2nd est) – GBPEUR
- Friday: (US) Retail Sales (Jul) and Michigan Consumer Sentiment (Prel) – GBPUSD
With US inflation and UK growth data the week’s key events, it may be worth speaking to your currency specialist about strategies for managing exposure around these releases.
