The US Dollar actually rose following the August employment situation report which showed payroll growth to have come in below analyst forecasts, but Sterling was able to defend its gains.
The US economy added 151k jobs in August accorrding to a report from the US Bureau of Labour Statistics on Friday.
The result was lower than the 180K decline estimated by analysts.
It lead to an initial fall in the value of the Dollar as the lower payrolls result reduced expectations that the Federal Reserve would see the economy as growing sufficiently to warrant another interest rate hike soon.
The British Pound to Dollar rate rose to 1.3333 after the release of the data from 1.3250 previously.
However, the USD soon embarked on a broad-based rally that perplexed many commentators.
Nevertheless, GBP/USD was able to hold some gains owing to its own consensus-beating run of UK economic data.
Buy why did the USD rise against the likes of the Yen and Euro?
"From all angles this report should have taken the dollar lower but instead it ended Friday with broad based gains. Looking at these numbers the Federal Reserve has a flimsy case for tightening in September and a hike in December remains in doubt but the rise in the dollar reflects more complex thinking," says Kathy Lien at BK Asset Management.
Taking a look at the Fed Fund futures contracts, the market is now pricing in only a marginally lower chance of a rate hike in September at 32% chance vs. the previous 34% chance.
A December hike is now set at 59% vs. 59.8% previously suggesting expectations for a rate hike this year did not change much after the payrolls report.
Therefore, pro-USD sentiment was clearly not shifted by the report.
Fed Will Raise Rates, and Drive Wedge Between the US Dollar and Pound say Westpac and Capital Economics
With the Fed's intentions in mind, we have noted fresh research on GBP/USD that suggests the pair will weaken notably.
Policy divergence - ie where one Bank raise rates and the other weakens rates - remains a key driver of global foreign exchange levels.
Capital Economics’ Alex Holmes argues the Dollar should ultimately strengthen versus Sterling again as the market has not sufficiently priced in the potential extent of Federal Reserve rate hikes during the remainder of the year.
At the same time Holmes says the Bank of England will increase its supply of monetary stimulus, which will undermine Sterling.
Holmes points to the rise in market-based interest rate expectations in the US as measured by overnight index swaps (OIS), which are used to gauge the likelihood of future rate hikes, as a sign that there is more of a chance of the Fed raising rates than most other central banks.
As a result, Holmes sees the Pound to Dollar rate falling as far as 1.2000 by the end of 2017 – from its current level of 1.3266.
Holmes is not the only analyst advocating a fall in the pound to dollar rate.
We also note a similar view from Westpac’s analyst Richard Franulovich, who makes shorting the GBP/USD a high conviction call, in a recent research note.
The difference with Franulovich, however, is that he sees the rate rising to a sell trigger level at 1.3370 first as, “Fears of a post-Brexit confidence shock have been assuaged” by stronger-than-expected retail and “survey” data.
However, he sees rebounds capped by the, “enormity of BOE’s easing programme,” a part of which includes a strategy to weaken GBP so as to boost exports.
The Westpac analyst also points to the risk of deeper declines for the pound if activity data show any weakness from the Brexit vote.
Bullish chart pattern contradicts Capital and Westpac’s bearish calls
From a technical point of view the evidence is not as one-sidedly bearish as the analysis above seems to suggest.
The daily chart is showing a possible double-bottom reversal pattern forming at the lows.
This seems to indicate the possibility of further upside could result if the exchange rate breaks clearly above the neckline and R1 pivot, marked by a move above 1.3410.
Such a move would confirm the activation of an initial upside target at resistance at 1.3625, which the exchange rate would be expected to rise up to.
Until a break above 1.3410, however, the pair could still recapitulate and fall back into its previous Brexit down-trend.
Nevertheless, from a technical perspective this would probably require a move below the double bottom’s lows at 1.2796, which would lead to an initial downside target at 1.2620.