Following yesterday's dip in the US services PMI, the dollar index saw further declines, marking its steepest two-day fall in a month. Despite a promising start to the week with an uptick in the US manufacturing PMI, featuring a notable rise in inflation, the services sector failed to mirror this trend. March witnessed the services sector experiencing its slowest price growth in four years. Although employment showed a slight increase, it remained in negative territory, shifting attention towards declining price pressures, supplier deliveries, and backlogs.
Market participants are now eagerly awaiting the US unemployment claims data due today and the non-farm payrolls report due on Friday, bracing themselves for potentially turbulent market movements. FX options implied volatility gauges highlight the perceived risk of heightened FX volatility, with upcoming events such as Friday’s US jobs report and next Wednesday’s US inflation print factoring into market anticipation.
The decline of the pound from $1.28 to approximately $1.25 against the USD in recent weeks led to a breach of several crucial moving average support levels, revealing increased downside potential. However, following yesterday's release of US data and dollar weakness, the pound managed to extend its recovery from seven-week lows, reclaiming ground above the 200-day moving average – a bullish development.
The response to the impending US jobs report could prove pivotal in determining whether the currency pair returns to the higher ranges of its narrow year-to-date spectrum or ventures towards fresh lows. Fundamentally, it seems investors may have accepted the notion of the Federal Reserve maintaining higher interest rates for an extended period, given that less than three rate cuts are currently being anticipated. Hence, unless US data presents a significant upside surprise, further gains for the dollar might prove elusive, thus mitigating downside risks for GBP/USD. It's worth noting that historically, GBP/USD has seen an average rise of over 1% during the month of April over the past two decades.
The EUR staged a recovery from its seven-week low, surging past the $1.08 mark, propelled by a stumble in the USD against major currencies, spurred by lackluster services sector data. Initially, EUR/USD faced downward pressure following less-than-anticipated flash CPI prints. Meanwhile, European shares edged closer to multi-decade highs attained last week.
