Pound US Dollar Exchange Rate Bolstered by Mixed US Payrolls

Pound US Dollar Exchange Rate Strengthens Following Non Farm Payrolls Miss

(Updated 15:45, 7/1/2022) The Pound US Dollar exchange rate firmed on Friday afternoon following the release of mixed US job market data.

December’s headline non farm payrolls came in at 199,000, well below forecast of 400,000.

However, November’s reading received an upward revision to 249,000 from 210,000, and October up to 648,000 from 546,000.

The US unemployment rate also fell more-than-expected to 3.9% from 4.2%, and wage growth unexpectedly rose 0.6% in December, increasing bets that the Federal Reserve will raise interest rates in March due to a tight labour market and fears inflation may become entrenched in wages.

Despite investors increasingly pricing in a rate hike from the Federal Reserve, demand for the ‘Greenback’ weakened.

Pound US Dollar (GBP/USD) Exchange Rate Steady amid Cautious Trade

The Pound US Dollar (GBP/USD) exchange rate is trading in a narrow range so far at the end of the week ahead of US payrolls data released in the afternoon.

Cautious trade has swept markets since the Federal Open Market Committee (FOMC) meeting minutes from December suggested the Fed may tighten monetary policy more aggressively than previously expected.

However, disappointing US data releases failed to provide support and the US Dollar is under modest pressure this morning, with GBP/USD trading at $1.3553 at the time of writing.

US Dollar (USD) Subdued ahead of Payrolls

After making solid gains in recent days, the US Dollar (USD) is coming under some pressure this morning as investors hold bets before the release of December’s US non farm payrolls data this afternoon.

The FOMC minutes from its December policy meeting triggered cautious trade in markets by hinting at more aggressive interest rate hikes and a reduction in the Federal Reserve’s asset holdings.

Citing soaring inflation and a tight labour market, the Federal Reserve’s more hawkish tone and signalling quantitative tightening surprised some investors, as interest hikes as soon as March have been expected by many analysts.

Following the release of the minutes and through Thursday’s session, US Treasury yields rose which in turn supported the US Dollar.

However, as investors await the publication of the influential US non farm payrolls this afternoon, Treasury yields have ticked lower and softened the ‘Greenback’.

US economic data releases later in Thursday’s session also failed to provide the US Dollar with significant support.

The ISM non-manufacturing PMI for December came in well below forecasts at 62, instead of the 66.9 expected.

The sharp slowdown in service sector activity from November’s record high disappointed investors, but the reading still represented the nineteenth consecutive month of growth in the sector.

Pound (GBP) Struggles as Healthcare Pressured

The Pound (GBP) is lacking significant support at the end of this week’s session, although the UK’s Covid-19 situation, and bets on a Bank of England (BoE) rate hike at its February meeting continue to drive movement in GBP.

News that hospital staff absences are up by 60% in England and increasing Covid-19 cases are fuelling concerns that the NHS may come under unmanageable pressure.

NHS national medical director Professor Stephen Powis said:

“Omicron means more patients to treat and fewer staff to treat them.

“In fact, around 10,000 more colleagues across the NHS were absent each day last week compared with the previous seven days and almost half of all absences are now down to Covid.”

He added:

“Covid cases in hospitals are the highest they’ve been since February last year.”

Concerns remain that soaring cases could lead to stricter Covid measures in England, while more staff absences could dent economic activity.

Pound US Dollar Forecast: Non Farm Payrolls in Focus

The Pound US Dollar exchange rate may experience volatility this afternoon following the release of the non farm payrolls report for December.

Forecasts point to the US economy adding 400,000 jobs last month, which would be up on November’s 210,000 reading.

With markets pricing in what could now be a more aggressive monetary policy tightening cycle from the Federal Reserve, further evidence of US job market recovery may support bets for a rate hike as soon as March, and in turn support USD.

Sign of tightness in the US job market such as wage growth, a high employment rate, and high numbers of vacancies would likely fuel expectations for faster tightening.

Meanwhile, in the absence of notable UK data releases at the end of the week, the Pound will remain sensitive to signs of disruption to UK economic activity due to surging Covid-19 cases, and the potential impact on the likelihood of the BoE raising rates again in February.

Andrew Roberts

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