GBP USD Exchange Rate Under Pressure Ahead of US Payrolls Data

October 6, 2017 - Written by Frank Davies

STORY LINK GBP USD Exchange Rate Under Pressure Ahead of US Payrolls Data

Although the Halifax house price index bettered expectations in September this was not enough to shore up the Pound US Dollar exchange rate ahead of the weekend.

Confidence in Sterling has remained distinctly limited in the wake of Theresa May’s poorly received Conservative Party conference speech, with rumours of a leadership challenge swirling.

As the Tories look no closer to unifying once again the political outlook for the UK remains rather less stable than markets would like.

The mood towards the US Dollar, meanwhile, has remained bullish thanks to the latest hawkish comments from Federal Reserve policymakers.

Signs continue to point towards the Fed raising interest rates once more before the end of the year, particularly after Thursday’s jobless claims and goods orders data bettered expectations.

Even though questions remain over the likely identity of the Federal Reserve Chair once Janet Yellen’s current term ends – with the Trump administration offering few clear signals on the subject – this has not been enough to particularly limit the strength of the ‘Greenback’.

Pound Weighed Down by UK Political Worries

A decided lack of stability within the Conservative Party is likely to remain a headwind for GBP exchange rates over the coming days.

Unless Theresa May is able to reassert some control over her party and regain the confidence of investors the threat of another leadership contest looks set to hang over the Pound.

Worries over Brexit are unlikely to ease in the near term either, with neither side showing any particular signs of progressing towards an agreement on key issues.

As the commencement of the next stage of the Brexit negotiation process seems set to start later than initially hoped the downside bias of the Pound remains significant.

Even so, hopes of an imminent Bank of England (BoE) interest rate hike could limit the softness of the GBP USD exchange rate.

So long as investors remain confident in the prospect of a November or December rate hike the Pound should retain some degree of support.

As strategists at TD Securities noted:

‘The BoE has flagged an imminent rate hike, boosting GBP's near-term prospects. While we question the sustainability of Sterling's recent gains, we are willing to go with momentum for now. UK growth has deteriorated while inflation has likely peaked. Brexit concerns continue to simmer in the background.’

However, Tuesday’s raft of UK production and trade data could undermine the case for any immediate policy tightening action.

Any signs of weakness within the domestic economy may give policymakers incentive to leave interest rates on hold for longer, leaving the GBP USD exchange rate vulnerable to further weakness.

Weaker US Payrolls Figure May Dent USD

This afternoon’s US non-farm payrolls report may dent the appeal of the US Dollar, with the headline figure forecast to have dipped markedly on the month.

The impact of September’s major hurricanes is likely to be felt in the labour market data, creating the potential for ‘Greenback’ softness.

As analysts at Nomura commented:

‘We expect nonfarm payroll employment to increase 50k, with a 45k increase in private payroll and 5k from the government. However, there are significant upside and downside risks to these forecasts depending on how employment, especially in Florida, was affected during the survey week.

‘More important, despite the print this Friday, the underlying pace of the labour market remains strong and any weakness in September will likely be transitory. We forecast an above-average 0.4% m-o-m increase in average hourly earnings.’

Unless the data surprises significantly to the downside the GBP USD exchange rate could struggle to find a major rallying point here.

However, soft wage growth could diminish the appeal of imminent policy action from the Fed, to the detriment of the US Dollar.

If markets see less chance of the Fed continuing to pursue its monetary tightening cycle in the near term then the ‘Greenback’ could come under renewed pressure.

US political developments may also offer some degree of support to the GBP USD exchange rate, although markets remain relatively confident in the Trump administration’s ability to deliver on its promised reforms.

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TAGS: Pound Dollar Forecasts