The GBP to USD exchange rate has fallen half a percent in the wake of blowout US jobs data which has markets increasingly confident of another US interest rate rise happening in 2016.
- GBP/USD falls to 1.3070 - lowest levels in three weeks
- EUR/USD 0.68% lower at 1.1090
- September too early for Fed rate hike, December odds now 71%
- Warnings that Fed could disappoint owing to elections
A better-than-forecast employment report from the United States has triggered a bout of US Dollar buying.
In the lead up to the much-anticipated US Employment Situation Summary the British Pound to Dollar rate had been seen recovering some of its Bank of England inspired declines suffered over the course of the past 24 hours.
The headline non-farm payrolls beat expectations for a reading of 180K to print at 255K. Job growth for the prior two months was revised higher by 18k net, with June employment gains now reported at 292k.
Average Hourly Earnings grew 0.3%, ahead of the 0.2% forecast by economists.
The data knocked the GBP/USD sharply lower.
The theory goes that a lift in jobs growth could inspire a September interest rate rise at the US Federal Reserve.
With the US Fed the only major central bank looking to raise rates it follows that the US Dollar is the only major currency that will likely enjoy strength on the back of global currency inflows.
In a world starved of yield, investors will put their money where the better rates are to be found.
The Dollar Index - a basket of the main USD pairs - was sent up by over 0.36% and is seen at 9609 at the weekend.
The Pound to Dollar exchange rate (GBP/USD) is a quarter of a percent lower on the day’s open and is quoted at 1.3070 on the mid-markets.
Bank payment rates are expected in the 1.2668-1.2577 vicinity, while more forgiving spreads are seen being offered by independent providers with quotes being covered in the 1.2916-1.284 region.
“Today’s non-farm payroll data may be down on last month but, after those hugely positive numbers, this represents more of a return to the form of the first six months of the year, and indicates Fed Chair Janet Yellen is presiding over a strong but not spectacular US economy,” says Dennis de Jong, managing director at UFX.com.
The unemployment rate has ticked down further to pre-2008 crash levels, and wages rising in kind will be music to the ears of those observers hoping for a rate hike.
"With 255K jobs added in the month of July and average hourly earnings growing by 0.3%, the U.S. economy shines compared to its peers. The outlook for the economy is also bright with the rise in the participation rate and number of hours worked per week. Americans are working more, making more and this healthy environment encouraged others to rejoin the workforce," says Kathy Lien at BK Asset Management.
Expect a Sharp US Dollar Appreciation as December Rate Hike Seen at 70%
Ahead of the event, analysts at Barclays advised they were looking for a strong reading from the US today and noted, “if labor markets confirm that job creation pace continues to be around 175k, a September hike would be likely again.”
Ahead of the event the fed funds market only priced a 22% probability of a hike for September and 36% for December.
The initial market response has been to raise the likely probability attached to a Fed hike by year end to 70% from the 36% seen on the fed funds market prior to the report.
Lloyds Bank believe that even with this data, however, the next policy meeting on September 21st may now be seen as too soon to raise rates by the majority on the FOMC.
"Instead we expect the Fed to next raise interest rates by 0.25% at its December meeting," say Lloyds.
In the July FOMC statement the Fed changed the language around labour “utilization” rather than “underutilization”.
“We think the Fed signalled that the bar for the number of jobs needed to motivate the next hike has fallen,” says a note from BNP Paribas.
BNP Paribas’ economists think the new threshold is somewhere in the range of 130k, which is comfortably beneath the number released.
“Our economists remains of the view that the probability of a Fed rate hike in September is more than 50%, versus market pricing for only 15%,” reads a note from the French bank.
With USD positioning a small net short according to BNP Paribas FX Positioning Analysis, analysts see considerable room for the USD to gain if data performs in line with their expectations and the market begins to re-engage with the idea of Fed tightening.
The Other Side of the Dime: A Lower USD Ahead
Looking beyond the data, the US election could contribute to the Fed shying away from raising rates.
Indeed, there are signs that implied volatility in some key currencies forwards with delivery set at around the election are elevated.
This confirms market nerves on a potential Trump victory.
"Tightening monetary policy is way more than just having strong jobs data and an inflation that is headed towards the target. The reality is that 15% of the US population is on food stamps which represent nearly 50 million Americans," says Yann Quelenn at Swissquote Research.
The Fed wants to appear hawkish but is actually dovish argues Quelenn.
As a result, Swissquote maintain a long-term view that the Dollar should continue dropping on the back of continued failed expectations that a rate hike will happen.
Indeed, "Yellen’s actions will be data dependent and, as the Fed will not meet again until September, today’s positive data could be well forgotten by the time they sit down to decide whether to intervene or not,” says UFX.com's de Jong.