Bracing for jobs report as Mideast tensions rise – United States – English

Written by Convera’s Market Insights team

All eyes on critical US data

George Vessey – Lead FX Strategist

The US dollar extended its recent rebound as yields on two-year and 10-year bonds rose to the highest in weeks. Fed Chair Jerome Powell’s slightly hawkish tone, coupled with some strong US data has fuelled the market developments. Safe haven USD demand amidst the escalating conflict in the Middle East is another bullish driver of the dollar.

In the short term, driven by weakness in other major currencies and some haven demand, the dollar’s bullish momentum should continue. The US’s economic exceptionalism is also fuelling further gains – with the ISM services PMI rising at its fastest pace since February 2023. However, the dollar’s longer-term trajectory still looks lower amidst the global easing cycle. Despite data this week leading to traders paring back their Fed cutting bets, the odds of the US central bank cutting interest rates by another half-point in November remains around 65%. With more Fed rate cuts priced in versus the ECB and BoE, this will likely limit the dollar’s upside potential, but if yields remain elevated despite rate cut expectations, the dollar may well be supported into November. Indeed, market sentiment keeps shifting – FX options traders are the most bullish for the USD since July, though positioning around the upcoming US payrolls report could shift the narrative once again.

Today’s jobs report may be the critical data point deciding the Fed outcome next month. If we see a below consensus non-farm payrolls number, we could still see the market price in a greater chance of a jumbo 50bp cut in November, weakening the dollar. A better-than-expected print adds to the argument of a 25bp cut, putting the dollar index on track for its best week since April.

Bailey lands knock-out blow to pound

George Vessey – Lead FX Strategist

The pound has been hit by the trifecta of risk aversion, solid US data and dovish Bank of England (BoE) comments this week. Geopolitical tensions increased demand for safe-haven assets, and hurt the risk-sensitive pound, delivering the first punch to GBP/USD. A raft of stronger US data and hawkish signals from the Fed, gave the dollar an edge. But the knock-out blow to cable was BoE Governor Bailey suggesting a more aggressive approach to rate cuts if inflation continues to improve.

GBP/USD is on track for its biggest weekly drop since July 2023, down around 1.7% so far. Money markets have moved to fully price a 25bps cut in November by the BoE and a 70% chance of a another in December, up from about 40% on Wednesday. Six rate cuts, up from five, are now priced in by the end of 2025. We’ve been vocal about the disconnect between BoE pricing versus its peers, and saw a dovish recalibration being the biggest risk to sterling’s outlook. The pound slumped more than 1% against both the dollar and the euro in the wake of Bailey’s comments, with GBP/EUR recording its worst day since 2022. With bullish GBP bets overcrowded, the risk is that the pound falls more dramatically if these bets are unwound. Options sentiment in GBP has already reached the most bearish level since mid-August.

Will the BoE’s Huw Pill offer the pound some support today? Pill was one of the dissenters in the August BoE meeting, who wanted to hold rates, while Bailey voted with the majority for a 25bp cut. The Chief Economist is speaking today and may pour cold water over Bailey’s recent dovish comments. For the pound to really pick itself up though, several other factors need to align, including positive surprises in UK economic data and a de-escalation of tensions in the Middle East.

Euro erases year-to-date gains

Ruta Prieskienyte – Lead FX Strategist

The broad euro index bounced back from three-week lows, buoyed by upward revisions in the Eurozone services and composite PMIs. Gains in excess of 0.4% against both the NZD and AUD were supported by cautious market sentiment due to the ongoing Israel-Iran conflict while weakness in the pound following dovish remarks from the BoE Governor Bailey saw EUR/GBP surge close to 1% on Thursday. However, EUR/USD remained under pressure as macro factors, particularly diverging rate expectations, continued to drive the pair. The market has reduced bets on Fed rate cuts, while expectations for an ECB rate cut at its October meeting have increased, weighing on the euro. 

The Eurozone composite PMI was revised higher to 49.6 in September, from an initial estimate of 48.9, but still entered contraction territory for the first time since February. While services slowed (51.4 vs 52.9) and manufacturing contracted further (45 vs 45.8), demand for goods and services in the euro area fell at the fastest pace in eight months, leading to backlog reductions and a quicker rate of job cuts. Business confidence also weakened slightly.

Consequentially, European equities declined for the fourth consecutive day, with month-to-date losses approaching 3%. Meanwhile, implied EUR/USD volatility rose to a two-week high ahead of the US NFPs report. Short-term risk reversals favoured euro puts, reflecting the most bearish sentiment since early August. Unless US NFP data surprises to the downside, the euro is expected to continue its decline, reflecting the region’s weak fundamentals.

Pound weaker across the board

Table: 7-day currency trends and trading ranges

Key global risk events

Calendar: September 30-October 04

All times are in BST

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.