The GBP/USD pair stabilized to start trading today, Friday, at 1.2723, after falling to around the 1.2700 level due to new recession fears following U.S. PMI data that came in below expectations.
This mixed poorly with the easing of British monetary policy after the Bank of England decided on an anticipated quarter-point rate cut.
In my view, the U.S. non-farm payroll data released today will be a crucial driver this week after the Federal Reserve outlined the required path in economic data for a rate cut in September, as widely expected. Investors hope for a continued decline, but not too sharp, in July’s new jobs.
Non-farm payrolls are expected to fall to 175,000 new jobs for the month compared to 206,000 in the previous month.
Initial U.S. unemployment claims for the week ending July 26 rose to 249,000 from 235,000 in the previous week, exceeding the expected rise to 236,000. The U.S. manufacturing PMI for July fell to an eight-month low of 46.8 compared to 48.5 previously, completely missing the expected increase to 48.8.
I believe the markets are currently facing a tough task as economic slowdowns increase expectations for a rate cut by the Federal Reserve. The markets are pricing in a 100% probability of at least a quarter-point rate cut on September 18, with a one in five chance of a 50 basis point cut.
However, if the slowdown becomes too severe, it could negatively impact market sentiment, making any rate cuts by the Fed less likely. This puts investors in a difficult position, hoping for rate cuts based on weak data but not wishing for a scenario of a sharp downturn and recession in the U.S. economy.
British bonds have risen sharply, and investors are pricing in further rate cuts by the Bank of England this year after the first monetary easing since 2020. The yield on ten-year UK government bonds dropped by about 11 basis points to 3.86%, while two-year interest rates fell by about 15 basis points, the largest drop this year.
The Monetary Policy Committee voted 5-4 in favour of reducing the main interest rate to 5%, although it did not provide specific guidance on where rates might settle. In my opinion, this will increase the sensitivity and volatility of the pair to economic data in the short and medium term.
The pound could fall back below the 1.2650 level, its lowest in five weeks, as falling government bond yields and ongoing uncertainty before the UK general election on July 4 put negative pressure on the pound, which is unlikely to ease soon. Meanwhile, the dollar continues to gain strength as a haven amid mixed economic numbers and the strength of the U.S. economy.
