- GBP benefits from sentiment improvement
- Gains to be challenged by U.S. jobs report
- Gas market stability aids EUR & GBP vs. USD
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Settled gas markets and rising equities provided the optimistic investor backdrop that tends to benefit the British Pound, but sentiment will be challenged by a crucial jobs report from the U.S. later.
Should 'risk-on' market conditions extend into Friday's close the UK currency will claim a rare weekly advance against the U.S. Dollar and a second successive weekly gain on the Euro.
"Sterling firmed as it benefited from improved risk sentiment," says Joe Manimbo, a currency analyst at Western Union Business Solutions. "A dearth of UK data this week has led the pound to take its main cues from broader market drivers."
The Pound-to-Euro exchange rate went to a new two-month high against the Euro at 1.1789 on Thursday in the wake of improved sentiment, while the Pound-to-Dollar exchange rate was able to build some temporary support just above 1.36.
Above: While GBP/EUR hit a new two-month high (top), GBP/USD was doing its best to arrest a run of weakness.
How Pound Sterling ends the week will depend to an extent on the looming U.S. jobs market report, due for issue at 13:30 B.S.T.
This report is particularly important in that: 1) it covers the return of in-person schooling, allowing parents to return to work, 2) covers a period when out of work benefits were cut and 3) is the final jobs report ahead of the all-important November meeting of the Federal Reserve.
"Sterling remained stronger for the week, a gain that may hinge on the strength of America's jobs report Friday," says Manimbo.
There is no clear-cut consensus on what a stronger-than-expected jobs report will mean for global markets and currencies.
A 2021 rate hike at the Federal Reserve appears to already be discounted by investors already, in which case stock markets and 'risk on' currencies such as the Pound might rise in response to stronger-than-expected figures.
But the market could also baulk at a stronger-than-expected jobs report in that it invites earlier interest rate rises, which can be interpreted as a major headwind to U.S. and global growth.
Above image courtesy of Forex.com.
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Further complicating matters is what the Dollar chooses to focus on: does it rise on a strong jobs, gaining support from an associated rise in bond yields, or does it fall as global markets rally and investors forego the Dollar's safe-haven qualities?
The Dollar has been a win-win bet in most market conditions over recent weeks and could yet extend this behaviour.
Regardless, this promises to be a pivotal jobs report that offers up volatility across the board and sets the major market themes into year-end.
Matt Weller, Global Head of Research at FOREX.com and City Index says he would anticipate a stronger Dollar on a strong jobs report.
He says the Dollar is likely to continue higher if the monetary policy divergence between the U.S. and Europe widens further in the wake of a strong report.
"Ahead of the US data, investors see more margin of recovery for GBP/USD than for EUR/USD, but we still view the consequent EUR/GBP attempts to dig below 0.85 as a short-term reaction," says Roberto Mialich, FX Strategist at UniCredit.
What to look for:
- The market consensus is for a 750K print for August.
- The Unemployment rate is expected at 5.2%
- Average hourly earnings are expected to rise 0.3% month-on-month
"If the data turns out to be very weak, then investors will probably sell the dollar hard," says Fawad Razaqzada, Market Analyst at Think Markets, an outcome that would benefit both the Euro and Pound.
"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," he adds.
Above: The price of the UK gas contract for November delivery.
Foreign exchange markets will also be watching gas markets for cues, with any further surges likely to destabilise sentiment and aid the Dollar to the expense of the Euro and Dollar.
Both the Pound and Euro steadied against the U.S. Dollar in the latter part of the week as gas prices fell sharply in response to Russia's commitment to significantly boost the supply of gas to the European market
Not only will the added supply from Russia put downward pressure on prices but the intervention pops any speculative excess that might have built in the gas market.
For the major currencies, the response is as we would expect: the Euro and Pound are recovering against the Dollar.
In a news piece out on October 07 Pound Sterling Live reported it appeared that the Euro was proving the more vulnerable to surging energy prices, given the exceptional advance in European gas contracts.
Putin said on Wednesday he would look to increase supplies to Europe beyond existing contractual obligations.
The impact on the gas market came not so much via the promise to increase supply but rather from the message itself: it came at the most opportune time, when frothy markets were most vulnerable to a countertrend development.
"These ferocious market dynamics seem characteristic of the usual froth around cycle peaks," says Yves Bonzon, Group Chief Investment Officer at Julius Baer.
Gas prices have had a notable impact on financial market volatility of late and the immediate outlook will depend on whether the worst of the surge in prices has already passed.
If this is the case equity markets can continue to recover, allowing pro-risk currencies to advance at the expense of the likes of the Yen, Franc and the U.S. Dollar.
Beneficiaries would include the Pound, Canadian Dollar, Australian Dollar, New Zealand Dollar and Emerging Market currencies.
"We are confident that the recent spike in energy prices is only temporary and that price pressures will ease in the coming months," says Bonzon.
Julius Baer maintain that the global economic expansion has merely suffered a setback but remains well placed to continue.
They view the recent surge in energy prices the result of an "exceptional coincidence of wild cards, such as adverse weather events, boost energy demand and deplete supplies, nourishing shortage fears".
The surge in gas prices "is exemplary of the ferocious dynamics that occasionally unfold in commodity markets," says Bonzon.
"Prices should cool later this year, as the market’s self-healing mechanisms have kicked in," he adds.