Sterling today: Pound firms as soft U.S. jobs data weighs on dollar
Sterling and the euro gained against the dollar after weak U.S. payrolls data reinforced expectations that the Federal Reserve will maintain current interest rates through year-end.
Intelligence analysis by Gemini 2.5 Flash
Currency markets reacted to a dovish U.S. jobs report, which saw a significant downward revision in payrolls, leading to a weaker dollar. Traders are now looking to Wednesday's U.S. CPI release as the next major catalyst, with a softer-than-expected inflation print potentially further harming the dollar.
Imagine money from different countries are like different kinds of toys. When the U.S. economy seems a bit slow, like fewer kids getting new toys, people think the U.S. might not make its toys more expensive (raise interest rates). This makes the U.S. toy (dollar) less popular, so other toys like the British pound or the Euro become a bit stronger and more wanted.
Analysis
U.S. Payrolls Report
Friday's U.S. payrolls report served as the initial test for market sentiment, delivering a clearly dovish and dollar-negative outcome. The report indicated a -20k payrolls print, which was further exacerbated by over 100k of downward revisions to previous months' data. This left the average job growth over the past three months at a mere 20k, significantly below market expectations and signaling a cooling labor market.
This soft jobs data has reinforced market bets that the Federal Reserve will hold its interest rates steady through the end of the year. Despite the repricing that occurred on Friday, some market participants still anticipate a slight chance of rate adjustments in September and December, with 11bp and 28bp priced in respectively. However, the overall sentiment leans towards a more dovish Fed stance, creating ample room for further dollar weakness if these expectations are met.
Wednesday’s U.S. CPI
The next significant event on the economic calendar is Wednesday's U.S. Consumer Price Index (CPI) release, which ING has identified as a crucial test in the lead-up to the September 16 FOMC meeting. The broker forecasts headline inflation at 0.1% month-on-month, which is below the consensus estimate of 0.2%. Core CPI is expected to remain steady at 0.2%.
A softer-than-expected CPI print would significantly strengthen the case for continued dollar downside, as it would further alleviate pressure on the Federal Reserve to consider rate hikes. Conversely, a hotter-than-expected core CPI print, exceeding the 0.2% consensus, poses the primary risk to this scenario. Such an outcome could stall the dollar's weakness and cap any gains seen in both sterling and the euro during the week, potentially shifting market expectations regarding the Fed's future policy path.
ING's Base Case
ING's base case scenario continues to project no Federal Reserve rate hikes for the remainder of the year, maintaining a bearish bias on the U.S. dollar. This outlook is heavily influenced by the recent dovish economic data and the anticipated impact of upcoming releases like the CPI. The firm suggests that short-term rate differentials have become the primary driver for currency pairs like EUR/USD, indicating that sensitivity to the Fed's narrative will remain exceptionally high.
The broker anticipates that EUR/USD could break above the 1.160 level this week if the CPI data comes in soft, with the next resistance point identified at the 200-day moving average of 1.1630. A sustained break above this 1.1630 level would confirm the next leg higher for the euro against the dollar. This forecast underscores the significant influence of U.S. economic indicators on global currency movements, particularly for major pairs like GBP/USD and EUR/USD, which are currently tracking broad dollar weakness rather than domestic developments.
Key points
- Sterling and the euro strengthened against the dollar following weak U.S. payrolls data.
- The soft U.S. jobs report reinforced market expectations that the Federal Reserve will hold interest rates through year-end.
- ING's FX strategist, Francesco Pesole, noted the -20k payrolls print was compounded by over 100k of downward revisions.
- Wednesday's U.S. CPI release is the next key event, with a softer print expected to further weaken the dollar.
- The pound's movement is primarily tracking broad dollar weakness, not UK-specific developments.
If the upcoming U.S. CPI data confirms a softer inflation trend, it would solidify expectations for the Federal Reserve to hold rates, further weakening the dollar. This could lead to continued gains for sterling and the euro, potentially boosting global trade and making dollar-denominated commodities more attractive.
A hotter-than-expected U.S. CPI print on Wednesday poses a significant risk, as it could challenge the dovish Fed narrative and strengthen the dollar. This scenario would likely cap gains for sterling and the euro, potentially creating headwinds for commodity prices and increasing market volatility.
