Tensions Build Ahead of Crucial US Data, Pound to Dollar Rate Poised for Breakout

September 6, 2024 - Written by John Cameron

STORY LINK Tensions Build Ahead of Crucial US Data, Pound to Dollar Rate Poised for Breakout

The Pound to Dollar (GBP/USD) exchange rate hit highs at 1.3175 after Wednesday’s US data before settling around 1.3160 on Wednesday as weak data undermined the dollar.

US data releases over the next two days will be extremely important for GBP/USD with high volatility inevitable, especially given the scope for very choppy trading in equities.

GBP/USD could hit 30-month highs above 1.3265 or 3-week lows near 1.30 depending on the data.

ING expects the Pound will struggle in the near term; “1.3100 is the risk for GBP/USD today.” Longer-term, it does expect dollar losses although it added; “medium term we see the cable rally contained in the low 1.30s.”

The latest Bank of England survey reported little change in wages growth, reinforcing expectations that the Bank of England will be cautious in cutting interest rates further.

There is now very little doubt that the Federal Reserve will cut interest rates at the September 18th policy meeting, but there is still notable uncertainty over the size of the cut.

Markets are pricing in around a 60% chance of a 25 basis-point rate cut and 40% chance of a 50 basis-point move.

San Francisco Fed President Daly was clear on the September meeting with comments that the “Fed needs to cut policy rate because inflation is falling and the economy is slowing.”

She added that the size of the cut is still uncertain and that the central bank is waiting for further data.

In this context, Friday’s US jobs report will be crucial for near-term direction and there are also important releases on Thursday with key business confidence and jobs data.

Notably weak data would trigger fresh recession fears and further volatility.

As far as Friday’s data is concerned, consensus forecasts are for an increase in non-farm payrolls of around 165,000 from 114,000 previously with the unemployment rate edging lower to 4.2% from 4.3%.

Weak data would trigger increased expectations of a 50 basis-point rate cut while a strong release would swing the pendulum back towards a smaller cut.

Lower yields would tend to undermine the dollar, but this could be offset by defensive demand if there is a slide in equities.

The latest US labour-market data was significantly weaker than expected with a decline in job openings to 7.67mn for July from a downwardly-revised 7.91mn previously and the lowest reading since April 2021.

CitiGroup commented; “the labor market increasingly looks to be at an inflection point with an even sharper weakening likely coming. A 50bp rate cut in September is likely."

Wells Fargo added; "Job openings data for July showed few signs of the ongoing cooling in the labor market coming to an end. For the Fed, (the) data reaffirm that the labor market is no longer a source of inflationary pressure to the U.S. economy."

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TAGS: Pound Dollar Forecasts