Sterling dips against stronger US Dollar in data heavy week

How will the pound finish August and perform in September?

As we often find, following a bank holiday, there is a lot to compress into the final days of the week.

That is certainly the case this week in the FX markets, we have a heavy economic calendar.

We have some key pieces of economic data to influence September’s interest rate decisions.

The FED, ECB and Bank of England all meet in the final weeks of September, and the FX markets will be looking at the current data sets to try to assess where interest rates are headed, which we know has a major bearing on FX rates.

The important data is mainly from the US and Eurozone, with Inflation numbers for both economies and NFPR data on Friday.

As we know EURUSD is the most heavily traded currency pairing, so this carries some real significance across the FX markets, not just for those individual currencies.

The US Dollar accounts for over 60% of globally traded FX.

A quick recap on last week for the FX Markets 

Jerome Powell signalled at the Jackson Hole Symposium that further hikes are still on the table.

By leaving the door open to further hikes, the market is still trying to guess the final steps of this interest rate cycle from the US.

The current market predictions are 86.5% odds on for the Fed to pause hiking in their September 20th meeting.

Interestingly, the odds for a hike in November are 50/50…

So, this gives us an idea of how the path of hikes is slowly cooling. And with that November hike being fairly balanced, markets are eagerly trying to determine when we will reach a peak.

Since January we have been trying to gauge when in fact we might begin to see, much further ahead, any corresponding cuts too.

US Jobs Openings Decline

Yesterday’s job openings data showed a decline by more than forecast, suggesting the labour market is cooling. It was the sixth decline in the last seven-months and was the lowest since 2021.

Essentially, this means Americans are less confident about finding a new job, which essentially gives less chances for wages to rise, thereby helping to temper inflation.

The American economy is roaring ahead, there are some predictions of annualised growth of 5%, and Unemployment is near a 50-year low.

In terms of data points today, we have US GDP today at 1.30, this is the second reading, and the expectation is 2.4%.

This is looking still at Q2, so up to June, so essentially a backwards-looking piece of data but still some potential for market movement.

Will the US dollar finish the week stronger?

US inflation is due tomorrow, and the Fed uses the ‘Personal Consumption Expenditures – Price Index’ reading, and the predictions are for a slight increase to 3.3%, versus the 3%.

Friday, we have the Non-Farm Payroll data and Unemployment rate. NFPR consensus is 170k new jobs, the previous was 187k.

This release can carry real significance across the US dollar, as well as other currencies.

US unemployment is near a 50-year low, and is expected to hold steady at around 3.5%

In terms of direction from the US dollar, Credit Agricole is predicting strong buying signals which could support a stronger dollar ahead.

They see the strong economic performance of the US economy, combined with the potential for interest rates to be higher and potentially for longer as Inflation remains high, as an indication the US dollar will remain attractive, and they are forecasting further strength.

What other data and news will move exchange rates this week?

Switching the focus to Europe, we have Eurozone Inflation data tomorrow, which is one of our headline releases this week.

Expectations are for a slight decline in the headline rate from 5.5%, to 5.3%, pointing to a further improvement in the EZ inflation situation.

However, the worry here is that the economy is cooling potentially too much. The Eurozone narrowly avoided a recession at the beginning of this year, weighing on confidence.

The Euro has been weaker more generally in recent months as investors become concerned about the economic outlook, with Germany in particular an area of focus.

Yesterday, the German GFK Consumer Confidence survey slipped, in a further sign of potential worries over the eurozone’s largest economy. We hit an all-time low on this closely watched survey earlier this summer.

Deutsche Bank are predicting 0.3% decline in third quarter for Germany, which will put further pressure on the ECB at their next meeting 28th September.

Will the European Central Bank raise interest rates?

For the ECB next meeting on the 28th September, the the split looks 50-50 as to whether they hike or not. This is the week after the FED and the Bank of England.

They are in a very difficult situation with some worries over economic growth, but also high inflation which could prove more damaging in the long run if it is not dealt with.

Finishing with the pound, there is no real significant data for the UK this week, it looks likely movement on the EUR and USD will prove more influential in determining sterling pairings.

Will the Bank of England hike rates in September?

Looking ahead for sterling, the Bank of England meeting is the 21st September. The hiking probability is reported as a 90% chance of a 25% basis point hike.

All in all, the rest of this week is very light week for the pound itself in terms of data. We can expect movement for the pound against its two major peers, the EUR and USD, owing to the important data from both of those respective economies.

As we sit currently, GBPUSD 1.2636, EURUSD 1.0873, and that is giving us a GBPEUR reading of 1.1622.

And for those wondering about the image, this was me being interviewed regarding the pound and Brexit in 2016. It is now seven years since my BBC appearance, how time flies!