GBP/USD Forecast: Dollar Survives US Jobs Test, Pound Blocked at $1.2500

February 9, 2025 - Written by David Woodsmith

STORY LINK GBP/USD Forecast: Dollar Survives US Jobs Test, Pound Blocked at $1.2500

The dollar dipped in immediate reaction to the latest US employment report, but quickly regained ground amid firmer underlying data and a smaller than expected benchmark revision.

At this stage, markets do not expect US interest rates will be cut below UK rates over the remainder of this year.

The Pound to Dollar (GBP/USD) exchange rate spiked to near 1.2500 before a rapid retreat to 1.2425.

The Pound to Euro (GBP/EUR) exchange rate settled just below the 1.2000 level amid position adjustment into the weekend.

US non-farm payrolls increased 143,000 for January compared with consensus forecasts of around 170,000, although there was a significant upward revision to the December gain to 307,000 compared with the flash reading of 256,000.

The unemployment rate edged lower to 4.0% from 4.1% previously.

Average hourly earnings increased 0.5% on the month compared with expectations of 0.3% with the annual increase holding at 4.1%.

The BLS also announced annual benchmark revisions with a decline in payrolls of 598,000 over the year, although this was below market expectations of around 800,000.

According to Peter Cardillo, Chief Market Economist at Spartan Capital Securities; “Basically, it's a report that raises inflation and inflation fears. It means the Fed will probably continue with its wait-and-see attitude, and that wait-and-see might actually have to be longer than perhaps what the market is expecting.”

Markets consider that the chances of a rate cut by June are only just above 50% with the most likely outcome only one cut this year.

MUFG commented; “if there is a knee-jerk drop in yields and the dollar on a weaker print, the one-off risks that may have impacted the data and the FOMC’s strong stance for a pause suggests to us that the move could quickly reverse.”

Domestically, Bank of England MPC member Pill stated that there is an on-going disinflation process in the UK, but added that pay disinflation was not as strong as thought in November.

As far as inflation is concerned, Pill stated that he was optimistic that an upward blip in inflation this year will not lead to second-round effects, but he did state that the bank needed to be vigilant.

He pointed to stagflation risks with comments that underlying pressures remain elevated, but that activity is weaker than expected.

Pill sees scope for gradual and careful rate cuts and he stated that this acts against cutting rates by 50 basis-point increments.

Following Pill’s comments, markets were slightly more cautious over the outlook for three rate cuts this year.

Scotiabank still expressed some reservations over the UK outlook; “BoE forecasts for weak growth and higher inflation may add to concerns that Chancellor Reeves fiscal plans may be disrupted by the sluggish economy.”

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TAGS: Pound Dollar Forecasts