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Pound to Dollar Exchange Rate Hits Six-Week Best After US Jobs Data

November 4, 2023 - Written by Toni Johnson


Friday's trade on foreign exchange markets saw the best Pound to Dollar exchange rate for UK buyers in six weeks.

Weaker-then-expected US jobs data triggered a slide in US yields, US Dollar (USD) losses and strong gains for the Pound Sterling (GBP).

There was also a further rally in risk appetite with strong gains in global equities.

Stronger risk conditions were key elements in underpinning the Pound and the Pound to Dollar (GBP/USD) exchange rate rallied strongly to a 6-week high at 1.2350 before a correction to 1.2325.

The latest US labour-market data recorded an increase in non-farm payrolls of 150,000 compared with consensus forecasts of 180,000. The September increase was also revised down to 297,000 from the previous reading of 336,000.

This was only the third time since May 2022 that the payrolls data has been weaker than expected.

Given a strong increase of 51,000 in government jobs, the increase in private payrolls was below 100,000 for the month.

Manufacturing jobs declined 35,000 on the month with some impact from a strike by AUW auto-workers while there was a 23,000 increase in construction jobs.

The AUW workers will be counted back into next month’s data.

The household survey recorded an increase in the unemployment rate to 3.9% from 3.8%, the highest rate since January 2022 while there was a reported decline in the number of employed of close to 350,000.

Average hourly earnings increased 0.2% on the month compared with expectations of 0.3% with the year-on-year increase slowing to 4.1% from 4.3%, although slightly above forecasts of 4.0%.

ING noted; “when you strip out the pandemic distortions it is the weakest annual pace of wage gains since before the pandemic struck.”

There was also a decline in weekly hours which suggested that labour demand had weakened.

ING added; “payrolls is the number that markets focus on and with unemployment rates and wages softening it all reinforces the view that the Fed is finished hiking interest rates.”

Following the data, there was a further rally in equity markets with S&P 500 index 0.8% higher in early trading.

Treasuries also rallied strongly with the 10-year yield declining to near 4.55%.

This was the lowest level for 6 weeks and compared with peaks above 5.00% seen in October.

Fed Funds rate futures also rallied with the chances of a December rate increase sliding to around 7% from 20% ahead of the data.

Richard Flynn, managing director at Charles Schwab UK commented; "Investors will interpret today’s jobs weak jobs report as a sign that demand is slowing in the labour market."

He added; "For central bankers, a loosening labour market is another reason to lean away from further interest rate hikes – something investors might view as a silver lining."

Nancy Vanden Houten, lead U.S. economist at Oxford Economics added; “The October jobs report provides plenty of evidence that labor market conditions are softening and will allow the Fed to keep policy on hold as it monitors its progress toward returning inflation to 2%.

According to CIBC; “Even discounting the strike's impact, underlying data implies that both labor demand and supply may be softening. This development could have implications for future economic policy, as it indicates a labor market that is potentially less tight than recent data had suggested.”

The US ISM non-manufacturing index also dipped to a 5-month low of 51.8 from 53.6 previously, reinforcing expectations of a slowdown in the dominant services sector.

If the Fed decides against further interest rate increases, there is reduced scope for a widening of yield spreads in the dollar's favour.

Markets were continuing to digest Thursday’s Bank of England policy decision.

The final reading for the October UK PMI services-sector index was revised to 49.5 from the flash reading of 49.2 and marginally above the September reading of 49.3.

This was, however, the third successive reading below the pivotal 50.0 level.
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