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Pound Sterling, Euro and Dollar Volatility Looms on Jobs Report Outcome

- U.S. jobs report centre and front for FX today
- Disappointment could aid GBP/EUR higher
- A beat could trigger downside vs. EUR and USD

US jobs report sets the tone for exchange rates

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  • Market rates at publication:
    GBP/EUR: 1.1648 | GBP/USD: 1.3836
  • Bank transfer rates: 1.1420 | 1.3548
  • Specialist transfer rates: 1.1590 | 1.3760
  • Get a bank-beating exchange rate quote, here
  • Set an exchange rate alert, here

Where the British Pound ends the week against both the Euro and U.S. Dollar will depend on the outcome of the U.S. jobs report for August, due for release at 13:30 BST.

With little on the UK's domestic calendar the Pound has found itself at the whims of global currents and none is more powerful than those emanating from the U.S. economy.

More specifically, exchange rate action remains heavily influenced by expectations regarding when the Federal Reserve will cut its quantitative easing programme and then raise interest rates, decisions that ultimately hinge on the U.S. labour market and inflation.

"A lighter week for UK economic data has left the pound largely tracking broader market sentiment which has found support from the view that the Fed appears in no rush to taper stimulus as the Delta variant clouds the economic outlook," says Joe Manimbo, Senior Market Analyst at Western Union Business Solutions.

The Dollar is expected by analysts to rally in the event that the non-farm payroll report beats expectations, an outcome that implies the Fed can taper its quantitative easing programme as soon as November and start preparing for higher interest rates.

While the Pound would likely lose ground against the Dollar it could potentially gain against the Euro on such an outcome as analysis shows the Euro to be more sensitive to hawkish U.S. interest rate expectations.

But, should the U.S. non-farm payroll headline come in below expectations the Dollar could track lower against both the Pound and Euro.

Pound against the Euro and Dollar

Above: GBP/USD top and GBP/EUR bottom. Note divergence in direction since August 20 when the market reconsidered expectations for U.S. economic exceptionalism.

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"The pound faces an important test of holding above this level today to give it a better chance of extending further north and potentially challenging $1.40 this autumn," says George Vessey, Currency Strategist at Western Union Business Solutions.

U.S. economic data has come in weaker than expected of late, (see Thursday's ADP payroll miss) which has in turn coincided with the Euro outperforming both the Dollar and the Pound.

This price action hints therefore that the Euro is positioned to advance further against the Pound in the event of a disappointing reading.

The market consensus is for a non-farm payroll reading of 750K, which is a decrease on the previous month's reading of 943K.

"Recent US economic data have come in below the expectations, for instance the Chicago PMI and Consumer Confidence. If the US employment report were to disappoint on Friday, the US dollar could decline further," says Georgette Boele, Senior FX Strategist at ABN AMRO.

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Surging cases of Covid-19 in the U.S. have corresponded with a slowdown in U.S. economic activity as consumers and businesses turn more cautious.

Investors are of the view the slowdown could give the Fed reason to pause for thought and push back the timing of when it will reduce its quantitative easing programme, thereby undermining the Dollar's recent strong run.

"In the wake of last week’s cautious economic assessment from Fed Chairman Jerome Powell, most market watchers aren’t expecting the US central bank to announce its taper plans until its November meeting at the earliest, a full three Non-Farm Payroll reports from now. Nonetheless, traders will still key in on Friday’s big jobs report to see if the labor market is recovering as expected or whether further delays may in the cards," says Matt Weller, Global Head of Research at FOREX.com and City Index.

Potential NFP reactions

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"Recent GBP/USD gains off Aug. 20's low at 1.3602 came as hawkish Fed expectations on tapering ebbed in the wake of Fed Chair Jerome Powell's dovish Jackson Hole speech, which he used to highlight his desire for more progress in employment," says Paul Spirgel, a Reuters market analyst.

Spirgel says a strong payrolls report may provide the needed impetus for a taper announcement at the September 22 Fed meeting, putting July 20's trend low at 1.3573 in focus.

Ahead of the report the Pound-to-Euro exchange rate is seen trading at 1.1654 while the Pound-to-Dollar exchange rate is seen at 1.3823.

"If the data turns out to be very weak, then investors will probably sell the dollar hard against the likes of the euro, which has benefited from surprising strength in Eurozone data of late," says Fawad Razaqzada, Market Analyst at ThinkMarkets.com

He says if data come in around expectations, then don’t expect too much movements in the markets.

"However, if Friday’s employment report comes in hotter than expected, then this will further cement tapering expectations and may lead to a mild bounce for the dollar," says Razaqzada.

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