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.
