British Pound Eases From 5-Month High as Markets Await Key Data

The British pound is gradually pulling back from its five-month high of $1.3270, which it hit against the US dollar at the end of August. Global sentiment has improved following Friday’s weaker-than-expected US job report, which sent ripples through financial markets. However, Sterling has yet to gain any upward momentum this week. Investors are holding back as they await critical economic data ahead of the Federal Reserve (Fed) and Bank of England (BoE) decisions later this month, with caution prevailing around pushing the pound above the $1.31 level.

Today's UK employment figures closely matched expectations, providing little incentive for significant market repricing. Unemployment dropped by 73.6k, lowering the rate to 4.1% in the three months to July. Meanwhile, average earnings growth moderated more than anticipated, falling from 4.6% to 4.0%, with earnings excluding bonuses slowing from 5.4% to 5.1%. Overall, the data does not appear to support any imminent policy easing from the Bank of England, with the probability of a rate cut in September currently around 22%. Markets are pricing in just one rate cut, which we believe is too hawkish. However, declining inflation and wage growth toward year-end could pave the way for an additional rate cut.

With labour market reports from both the US and UK now behind us, investor focus is shifting to upcoming GDP and inflation data. Tomorrow’s release of UK GDP, goods trade, industrial production, and manufacturing production figures will be followed by US inflation data, which could determine whether the Fed opts for a 25 or 50 basis point rate cut next week. Implied one-week volatility rates for GBP/USD and GBP/EUR have recently settled at their 2024 averages of around 6.4% and 4.4%, respectively. As global equities enter a seasonally weaker phase and with key rate decisions and the US election approaching, investors may be underestimating the potential risks in foreign exchange markets.

Global Equities Find Strength Amid Hopes for Central Bank Intervention

Global equity markets began the week on a stronger note, with dip-buying behaviour persisting as investors remain hopeful that central banks will step in before growth concerns take hold. Last week, the Bank of Canada implemented its third rate cut of the year, while the European Central Bank (ECB) is set to make its second cut on Thursday.

The US dollar followed bond yields higher in anticipation of tonight's presidential debates and Wednesday's critical CPI report. The Greenback has been on a steady decline, dropping about 4% since early July and turning negative for the year. Falling bond yields and heightened expectations of Federal Reserve easing have weighed on the appeal of the dollar, reinforcing a medium-term negative outlook. In the short term, further below-consensus economic data would be needed to push pairs like EUR/USD and GBP/USD higher. Inflation, expected to fall from 2.9% to 2.6% in August, is unlikely to support the dollar this week. With markets already factoring in a 25-basis-point rate cut, a downside surprise in inflation would likely have a greater market impact than an unexpected upside.

EUR/USD Faces Key Test Ahead of ECB Decision and US Election Debate

EUR/USD is holding near the $1.104 support level, but this support may soon be challenged. With few domestic macroeconomic events scheduled before Thursday's European Central Bank (ECB) rate decision, tonight's US election debate could provide the first major catalyst of the week. While one-week risk reversals narrowed significantly during yesterday’s session, they remain slightly tilted in favour of euro calls, indicating a marginal bias toward further euro strength.

Global Markets Slide Following Disappointing US Jobs Data

Global stocks dropped sharply on Friday after a weaker-than-expected US jobs report heightened concerns of an economic slowdown. The August non-farm payrolls report showed 142,000 new jobs, falling short of the forecasted 165,000. Additionally, the previous two months’ figures were revised downward, with July's numbers reduced from 114,000 to 89,000, and June’s from 206,000 to 179,000.  US stock markets reacted negatively to the news, with the S&P 500 falling by 1.7% and the Nasdaq dropping 2.6%.

Key US Inflation Data and Central Bank Decisions to Shape FX Markets This Week

FX markets will be influenced by critical economic data releases and central bank announcements this week, with a focus on the US Consumer Price Index (CPI) and the European Central Bank's (ECB) policy decision.  The US CPI data for August, scheduled for release on Wednesday, will offer crucial insights into inflation trends in the world’s largest economy.  On Thursday, the ECB’s rate decision will be closely monitored as investors gauge the bank’s approach to managing inflation and fostering economic growth in the Eurozone.  The ECB is anticipated to lower rates by 25 basis points, with the main attention focused on the communication and specifics of the ECB staff projections.

In Asia, China's inflation and trade balance figures, due Tuesday, will provide key indicators of the health of the region’s largest economy and its potential effects on regional currencies.

British Pound Gains Strength Ahead of Key Economic Data

GBP has shown resilience, bolstered by positive economic data suggesting accelerated growth over the summer. This momentum, along with the Bank of England’s cautious stance on further rate cuts, has driven GBP/USD close to the $1.32 mark, nearing 30-month highs. Despite the uptrend, resistance is noted at $1.3265, while support holds at $1.3050.

The pound posted its strongest gains against commodity currencies, particularly the AUD, NOK, and NZD, but underperformed against safe-haven currencies like the Japanese yen and Swiss franc, resulting in the Pound Index closing 0.2% lower for the week. Meanwhile, the pound has recovered its August losses against the euro, approaching the mid-€1.18 level, edging near 2024 highs. However, seasonality trends for the second half of the year are typically unfavourable for the pound, which could limit further gains, even with the ECB potentially shifting its focus to growth concerns. Notably, one-week EUR/GBP implied volatility has hit a three-week high ahead of the ECB rate decision.

Upcoming data releases, including UK employment figures on Tuesday and July’s GDP data on Wednesday, will play a key role in determining the pound’s short-term trajectory.

US Dollar Declines Amid Weaker-than-Expected Labour Market Data

The US dollar weakened overnight after a softer-than-anticipated US labour market report heightened investor concerns ahead of the crucial non-farm employment figures due later today. The August ADP employment report showed an increase of just 99,000 jobs, falling short of the 144,000 forecast and lower than July's downwardly revised figure of 111,000.

Looking ahead to today’s key US jobs report, expectations are that non-farm payrolls growth will edge up slightly to 130,000 in August. While the pace of job growth is slowing, July's sharp drop may have been exaggerated by temporary weather conditions, which are expected to normalize this month.

The unemployment rate is projected to stabilize at 4.2%, following a four-month rise. Although the rate may gradually increase due to slowing hiring, it is expected to do so steadily, barring significant layoffs. Several factors, including the broader economic environment, inflation trends, and the current market expectations for Federal Reserve actions, will influence how much further the US Dollar Index (DXY) could decline.

Euro Area Q2 2024 GDP Growth Projected at 0.3% QoQ

The euro area’s GDP growth for Q2 2024 is expected to come in at 0.3% quarter over quarter. This forecast includes an anticipated 0.1% decline in consumer spending and a 0.6% drop in fixed investment.

On the other hand, government spending is projected to rise by 0.6% for the quarter. Importantly, net trade—driven primarily by peripheral nations—is expected to contribute +0.4 percentage points to the overall GDP growth.

The euro has remained resilient during the US dollar's recent weakening phase, with the currency showing strong performance in Asian markets. However, in EUR/USD, significant resistance lies in the 1.125–1.1297 range, which could limit the euro's further gains in the near term.

Euro Gains on Soft US Labour Data, While European Stocks Decline Amid Global Rout

The euro strengthened by over 0.3% on Wednesday, reaching $1.1085 against the US dollar after a weak US labour market report, reversing its losses for the week. In contrast, European stocks fell, with the STOXX 50 dropping over 1% as part of a global stock market downturn. Bonds rallied across markets, following similar moves in US Treasuries, while the front-end yield spread between Germany and the US narrowed to below 150bps, the smallest margin since May 2023.

In the Eurozone, domestic market activity was quiet, overshadowed by US developments. The Eurozone's August services PMI was revised down to 52.9 from 53.3, marking the seventh consecutive month of expansion, with the sharpest growth in three months. This growth was mainly driven by France, likely boosted by preparations for the upcoming Olympic Games.

Meanwhile, ahead of the September 12 ECB rate-setting meeting, several ECB officials shared their perspectives before entering a quiet period. Policymakers are largely expected to cut borrowing costs again following a significant reduction in June. ECB’s Kazaks hinted at a potential rate cut in the upcoming meeting, echoing other officials’ support for further cuts after no action was taken in July. The case for another cut has been supported by inflation falling to its lowest level since mid-2021, although some policymakers remain cautious, emphasizing that inflationary pressures are not fully resolved.

In the FX volatility market, attention is focused on the upcoming US Non-Farm Payrolls (NFP) report. A slight weakness in the dollar is expected to persist, especially if the US services ISM underperforms. EUR/USD one-week implied volatility rose to 7.5%, about 150bps above realized volatility, hitting a two-month high.

US Dollar Slides After Weak Labour Data, Focus Shifts to Upcoming Non-Farm Payrolls

After a strong start to the week, the US dollar weakened following softer-than-expected labour market data. Investors are now closely watching Friday's non-farm payrolls (NFP) report. Markets were already rattled by Tuesday's disappointing manufacturing PMI and a sharp drop in job openings for July, released on Wednesday.

Futures markets now predict a 45% chance of the Federal Reserve cutting interest rates by 50 basis points at its September meeting. Bond yields continued their two-week decline, and for the first time since 2022, the yield curve (2-year vs. 10-year) un-inverted. The US dollar dropped against all G10 currencies in yesterday's trading.

Job openings fell from 7.91 million to 7.67 million, the lowest level since early 2021. According to the Bureau of Labour Statistics, a key Fed metric—vacancies per unemployed worker—reached a three-year low. The decline was mainly driven by reductions in vacancies in the government, healthcare, and trade & transportation sectors. Additionally, the number of people quitting jobs and those finding new ones fell below pre-pandemic levels, standing at 3.28 million and 5.52 million, respectively.

Survey data from the Conference Board, including the labour market ratio (jobs plentiful vs. jobs hard to get), suggests further softening next month. The same is true for Tuesday’s PMI, with the new order vs. inventory indicator pointing to continued challenges in manufacturing. Friday’s jobs report will be crucial in determining whether the Fed will opt for a 25 basis point cut instead of a larger 50bp reduction and could either restore confidence in the dollar or lead to further weakness if job growth disappoints.

Canadian Dollar Strengthens Despite Dovish Bank of Canada Rate Cut

The Canadian dollar edged toward the low CAD/$1.35 range against the US dollar, despite the Bank of Canada’s dovish policy decision. Canadian bonds outperformed US Treasuries, with the 10-year yield trading about 2 basis points higher relative to the US 10-year, which remained largely unaffected by the BoC’s decision.

The Bank of Canada cut its policy rate by 25 basis points, lowering the overnight lending rate to 4.25%, as expected by the market. The central bank pointed to growing economic concerns, with inflation nearing the 2% target. Preliminary data suggests Q3 growth could fall short of the Bank's July projections, while the labor market remains stagnant, with unemployment steady at 6.4%. This opens the door for potential further rate cuts. Governor Macklem also highlighted that persistent price pressures in the housing market and certain service sectors continue to drive inflation.

Despite the rate cut, the Canadian dollar remains one of the more vulnerable G10 currencies, as yield differentials diminish its attractiveness. The BoC has already implemented three rate cuts this year and is expected to continue easing, while the extent of the Federal Reserve’s future rate cuts remains uncertain. Currently, overnight index swaps are pricing in an additional 58 basis points of cuts by the BoC by year-end, compared to 100 basis points anticipated from the Fed.