British Pound Surges to New 2024 High as Weak U.S. Labour Data Fuels Dollar Decline

GBP surged to a new high for 2024 against the USD after data revealed that the U.S. labour market was weaker than previously estimated, likely prompting the Federal Reserve to take action. The Pound-to-Dollar exchange rate climbed to 1.31 after the Bureau of Labour Statistics admitted it had overestimated job creation by 818,000 in the 12 months leading up to March 2024.

This boost pushed the best rate for international transfers above 1.3050, giving UK buyers of USDs their most favourable exchange rate since July 2023. The USD weakened across the board following the data release, as market expectations for Federal Reserve rate hikes increased. The Fed has indicated that it is closely monitoring labour market softness when considering potential rate cuts.

Before the data was released, the GBP/USD exchange rate had been struggling to break through a technical resistance around 1.30-1.3040. However, the new data and the subsequent market response might lead to a more decisive upward movement in the exchange rate. The market's reaction to the BLS payroll revision has caught many by surprise, as such revisions have typically gone unnoticed in recent years.

Strong UK Economic Outlook

GBP continues its upward momentum against most major currencies, buoyed by a risk-on sentiment in the markets. Investors are optimistic about the increasing likelihood of further monetary easing by the Federal Reserve following dovish minutes released yesterday. Today's focus is on the flash PMIs, which are expected to show that the UK economy remains strong in 2024.

GBP/USD is trading at its highest level in over a year, maintaining a bullish tone with a sustained break above its 200-week moving average. The pair has risen in 10 of the last 11 trading sessions and is hovering near $1.31—a level it has surpassed only four times in the past 522 trading days. FX options pricing suggests a 40% implied probability that GBP/USD will be above $1.32 by year-end, compared to a 25% chance of it falling below $1.28. However, the relative strength index (RSI) indicates overbought conditions, which could lead to a short-term pullback or consolidation.

Rate differentials continue to favour the Pound, with money markets anticipating fewer than two rate cuts by the Bank of England by year-end, compared to four expected from the Fed and three from the ECB. The Jackson Hole symposium, starting today, will offer further insights into the global monetary policy outlook as traders closely watch upcoming speeches by central bankers.

Sterling Reaches New Highs: GBP/USD Surpasses $1.30 Amid UK Economic Optimism

Yesterday, the British pound reached its highest level against the US dollar since July 2023, reclaiming its position as the best-performing G10 currency so far this year. The GBP/USD pair has surged over 3% from its August low, closing above the crucial $1.30 mark for only the second time in 2024.

Sterling’s rise is fuelled by a weaker US dollar, favourable rate differentials, and an improving economic outlook for the UK. However, its gains against the euro have been more limited, as the pound struggles with the €1.17 level amid flows into the euro, which have pushed EUR/USD above $1.11. Data this week showed that British companies increased job advertisements for the first time this year, signalling strength in the UK labour market. The job-search platform also noted a rise in the number of job seekers, creating the most competitive hiring environment since May 2021, when the country was emerging from Covid-19 lockdowns. However, official reports and surveys indicate that vacancies are still declining, as the Bank of England closely watches labour market data for any signs of wage and price increases driven by worker shortages, which have been a concern in recent years.

The next key data points for GBP price movements will be the flash PMI figures released on Thursday, along with speeches from global policymakers at the Jackson Hole Symposium, which begins tomorrow.

Euro Hits 2024 High Above $1.11 as Fed Rate Cut Speculation Intensifies

The Euro climbed above $1.11, hitting a new high for 2024, as increasing expectations of a Fed rate cut continue to weigh on the dollar. The pair could see further short-term gains if the anticipation of cuts to the federal funds rate keeps global equity markets on the rise and volatility on the decline ahead of the Jackson Hole conference, despite overbought signals from momentum indicators. Bunds rose while European stocks saw a slight decline during Tuesday’s session, ending a six-day winning streak.

Sweden’s Riksbank lowered its policy rate for the second time this year to 3.5% and signalled the possibility of two or three more cuts before the end of the year, one more than previously projected in June. This updated forward guidance is more in line with current market expectations, which, at the time of writing, had 78 basis points priced into the OIS curve.

Positive Economic Data Fuels Risk Sentiment as Focus Shifts to Fed's Rate-Cutting Prospects

US inflation continues to ease, initial jobless claims were lower than expected, retail sales in July saw their best performance of the year so far, and consumer confidence rose for the first time in five months. These positive developments contributed to upbeat risk sentiment last week. Investors focused on the disinflation narrative and a risk-on rally, leading to a sell-off in the dollar, despite lower recession probabilities that would typically support the Greenback.

This reaction can be understood through the perspective of Fed funds futures. Stronger macroeconomic data have increased the likelihood of a 25 basis point rate cut in September (rather than 50 basis points), with around 175 basis points of cuts priced in over the next 12 months. This significant expectation of easier monetary policy has weighed on the dollar.

Jerome Powell’s upcoming speech at the Jackson Hole Symposium later this week is expected to shed more light on the Federal Reserve’s response to recent economic data. Options markets are currently predicting a swing of over 1% in the US equity benchmark (S&P 500) on Friday, driven by Powell’s address. The focus has shifted from whether the Fed will cut rates in September to the extent of the cuts. For risk assets to continue their upward trend, Powell will need to reinforce this message. Investors are optimistic about imminent rate cuts and are betting on reduced volatility, with the central bank’s data dependency highlighting the importance of upcoming macroeconomic data.

British Pound Recovers as GBP/USD Surges Amid Easing US Inflation and Strong UK Economic Data

GBP recovered its losses from the previous three weeks in just one week, with GBP/USD rising by 1.4%. This was the currency pair's fourth-best performance of the year, driven by easing inflation in the United States and the UK economy surpassing expectations.

US bond yields are falling more swiftly, shifting the rate differential in favour of the pound. For the first time since last September, investors are now receiving a higher yield from British 10-year government bonds compared to US Treasuries. This shift has helped GBP/USD climb back to the high $1.29 level, with $1.30 now clearly in sight.

From a macroeconomic standpoint, August has effectively concluded for the UK, with all pertinent data released last week. Retail sales, GDP, and labour market figures all surpassed expectations, while inflation increased more gradually than anticipated. This news will be welcomed by the Bank of England, which is striving for a smooth economic transition and now faces uncertainty over its next rate decision. The positive developments are likely to bolster the pound for a period, but the direction of the currency pair will ultimately hinge on upcoming US economic data.

Euro Gains from Risk-On Sentiment as Focus Shifts to US Economic Data and Fed Expectations

The euro has recently gained from a renewed risk-on sentiment, despite investors recalibrating their expectations for substantial Federal Reserve easing in 2024. Positive economic data from the US have alleviated fears of a sharp economic downturn. This, combined with the renewed risk-on sentiment and enhanced market stability, has propelled EUR/USD close to its 2024 peaks.

Domestically, growth remains largely supported by the services sector, while manufacturing continues to struggle, with industrial production falling sharply. Recent indicators, such as Germany’s ZEW survey, have worsened, reflecting growing uncertainty and concerns about global events. Despite these challenges, investors are currently more focused on US developments and the Federal Reserve’s outlook.

This week’s negotiated wages data could shift attention back to the European Central Bank (ECB), as this metric is crucial for the Governing Council when considering future rate cuts. Recent data from Italy have shown persistent upward wage pressures, and if this trend is reflected in broader Eurozone figures, it could challenge expectations of an ECB rate cut in September, potentially boosting the euro. Flash August PMIs, due later this week, will also be important for assessing growth momentum. Any further signs of deterioration could diminish some of the euro’s recent gains.