Pound Sterling Surges to 1.2890 Against U.S. Dollar on Increased FED Hike Bets

March 9, 2024 - Written by John Cameron

STORY LINK Pound Sterling Surges to 1.2890 Against U.S. Dollar on Increased FED Hike Bets

Markets More Confident over June Fed Rate Cut After US Jobs Data, GBP/USD Surges to 7-Month Highs

The latest US jobs data overall suggested that the very strong January report had been overstated and that the labour market overall was less tight.

The dollar moved lower and the Pound to Dollar (GBP/USD) exchange rate surged to 7-month highs at 1.2890 before settling around 1.2975.

Following the data, markets were more confident that the Federal Reserve would be in a position to cut interest rates in the first half of 2024.

The Pound also gained support from a fresh boost to risk appetite.

The US S&P 500 index posted a fresh record high on Thursday and futures posted fresh gains following the jobs data.

Although the FTSE 100 index traded slightly lower on the day, optimism over easing global financial conditions underpinned the Pound in global markets.

Market expectations of a June cut increased to above 80% from around 70% previously with over a 30% chance of a May cut.

Treasuries posted renewed gains following the data with the 10-year yield declining to near 4.05%.

The dollar lost ground into the release and posted another round of losses following the release with the currency index also retreating to 7-week lows.

The shift in yields and rate expectations undermined the dollar, but good news has been priced in and the dollar is likely to be resilient at lower levels.

There was another very mixed US employment report for February.

The headline increase in non-farm payrolls was again notably stronger than expected at 275,000 compared with expectations of close to 200,000, but the January increase was revised sharply lower to 229,000 from the original reading of 353,000.

Manufacturing jobs declined slightly on the month and there was a third successive decline in temporary help jobs which suggests that overall labour demand has eased.

There was a reported decline in the number of employed of over 180,000 and the unemployment rate increased to 3.9% from 3.7%.

As far as wages are concerned, there was a 0.1% increase after a revised 0.5% increase the previous month with a slight slowdown in the annual increase to 4.3% from 4.4%.

Ali Jaffery of CIBC Economics commented; "Wage growth appeared to cool sharply this month with growth of just 0.1% but this mostly reflects distortions from bad weather in last month’s report. Underlying wage growth is likely still firm as implied by other wage data."

According to Peter Cardillo, chief market economist at Spartan Capital Securities; "The bottom line is this was a little bit hotter than we were looking for in terms of nonfarms and hourly wages as well, but if you look at the revisions, I think that is basically pointing to a less robust outlook going forward.”

According to ING; “So on balance, we would have to say this is a weaker report than was expected, but not weak enough to change the Fed's mindset that there is no need to do anything imminently.”

It added; “with more cooling in the jobs market looking probable we continue to see a strong chance of a June cut with the Fed indicating a desire to gradually move policy back to more neutral levels later in the year. Note that this is now fully priced by markets.”

Markets overall were more confident that the Federal Reserve and ECB would cut interest rates ahead of the Bank of England.

Karsten Junius, chief economist at J. Safra Sarasin Sustainable Asset Management commented; "We think the BoE is likely to wait somewhat longer than the Fed and the ECB to start easing policy."

He added; "The main reason for this delayed reaction is that so far, the fall of services inflation and wage growth has been very limited, suggesting that underlying inflation might be stickier than elsewhere."

UK labour-market and GDP data will be watched closely next week with a particular focus on wages given the importance for the Bank of England.

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TAGS: Pound Dollar Forecasts