Dollar consolidates after blowout jobs report – United States – English

Written by Convera’s Market Insights team

US exceptionalism back in spotlight

George Vessey – Lead FX Strategist

The US dollar index jumped to its highest in seven weeks and recorded its best week since Sep 2022, surging against GBP, EUR, JPY and CHF as central banks around the world appear set to out-dove the US Federal Reserve (Fed). US job growth last month topped all estimates and wage growth accelerated, reducing the odds the Fed will opt for another big (50bp) interest-rate cut in November.

The September jobs report was staggeringly strong, with the labour market adding 254,000 net new jobs last month. This was far higher than the 150,000 net jobs expected from forecasters. Additionally, there were upward revisions to the July and August numbers, a reverse from what we’ve seen over the last several months. Along with the strong job growth, the unemployment rate ticked down to 4.1%. Combined with data earlier in the week showing demand for workers is still healthy, the payrolls report is likely to alleviate concerns that the US labour market is deteriorating. Hence, markets are now pricing around 50bps of easing by year-end from the Fed, down from around 75bp two weeks ago. The next test for Fed pricing and thus the US dollar is this week’s US CPI inflation report but we doubt the data will reignite jumbo cut expectations, therefore the dollar should consolidate around current levels.

Ultimately, so long as US economic exceptionalism keeps pushing back bets on Fed easing, the dollar’s gains can extend further. But the resilience of the US economy and boosted soft-landing hopes should see global risk sentiment buoyed too. Couple this with China’s recent stimulus measures, plus rising energy prices, G10 high beta currencies, especially those with positive exposure to higher commodity prices (AUD, CAD, NOK), should fare well against the dollar.

Pound suffers worst week in over two years

George Vessey – Lead FX Strategist

The pound suffered its worst week since July 2023 versus the US dollar, falling by 1.8% from around $1.34 to $1.31. Sterling was hit by the trifecta of risk aversion, solid US data and dovish comments from Bank of England (BoE) Governor, Bailey. The market moved to price consecutive cuts in the UK, reducing the pound’s rate advantage, which has supported it throughout the year.

UK GDP data on Friday will show whether the economy returned to growth in August after posting no growth in July. With final Q2 GDP data and September PMIs revised down slightly, the door has been opened to more aggressive monetary easing than markets were pricing in. Hence, with growth and yield differentials starting to weaken for sterling, demand might remain tepid for the UK currency and $1.30 for GBP/USD could be tested soon. Despite the pound’s fall of late though, it remains the best-performing G10 currency year-to-date. GBP/USD remains in the top quarter of its 1-, 2- and 3-year ranges, and three cents above its 5-year average rate of $1.28.

In the FX options market though, traders have turned the most bearish on sterling versus the dollar since August, having been the most bullish since the pandemic just a few weeks ago. Expected volatility in GBP/USD over one-week and one-month timeframes has also jumped to the highest level this year, exemplifying how traders are rushing to hedge risks of more volatility and sterling weakness in the future.

Weak European data weighs on euro

George Vessey – Lead FX Strategist

Last week’s strong US data were in stark contrast with weak Eurozone activity indicators, such as manufacturing PMIs and softening inflation. As a result, a re-pricing of both central banks’ monetary policy outlooks has dragged EUR/USD under $1.10 for the first time in seven weeks, though it’s the Fed’s trajectory that’s in the driver’s seat for the common currency.

Softer activity and sentiment data and faster disinflation has had an immediate impact on both European Central Bank (ECB) communication and markets, which are now pricing a 95% probability of a 25bp October cut. With bets on ECB rate cuts ramping up versus bets on Fed cuts reducing, the difference between easing expectations has reduced to zero. This has pulled the euro lower. Although the stimulus package from China operates in the opposite direction, its inability to lift EUR/USD beyond $1.12 suggests the leg higher hinges on the evolution of US data and monetary policy as well as the US election result and trade policy.

This week attention shifts to retail sales (Mon), ECB minutes (Thu) and a batch of Governing Council speakers. Amidst the persistent economic weakness in the region and the pace of disinflation, further dovish comments from the ECB should keep EUR/USD pinned under $1.10 in the short term.

USD/JPY swings over 5%

Table: 7-day currency trends and trading ranges

Key global risk events

Calendar: October 07-11

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.