Pound-Dollar Rate Extends Gains on ADP Miss

• GBP/USD reference rates at publication:
• Spot: 1.3780
• Bank transfers (indicative guide): 1.3340-1.3495
• Money transfer specialist rates (indicative): 1.3656-1.3684
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The Pound-to-Dollar exchange rate advanced to 1.3785 in the wake of underwhelming U.S. data which eases pressure on the U.S. Federal Reserve to announce an imminent withdrawal of monetary stimulus.

The Dollar was softer against all its major peers after the release of the August ADP Nonfarm Employment Change which read at 374K which was far below the consensus expectation for a reading of 613K.

The data suggests the U.S. economic rebound might be slowing with economists blaming a rise in Covid cases.

"ADP hugely undershot the official number in July, for reasons which aren’t entirely clear," says Ian Shepherdson, Chief Economist at Pantheon Macroeconomics. "The Delta Covid wave likely is to blame; the hit to consumers’ spending on discretionary services is clearly visible in the near-real-time data."

Above: USD performance on Sept 01.

"Sterling edged toward two-week highs against the greenback after Delta appeared to rear its head in the latest U.S. job figures. Sterling capitalised on the dollar’s fall after ADP hiring showed private sector hiring increased by a lackluster 374,000 in August," says Joe Manimbo, Senior Market Analyst at Western Union Business Solutions.

A slowdown in the recovery of the U.S. labour market will ease pressure on the U.S. Federal Reserve to announce plans to reduce its quantitative easing programme (tapering) at its September policy meeting, perhaps opting to wait until November to do so.

The Dollar has been supported during 2021 by expectations for the Fed to reduce its monetary stimulus, therefore any delays to this agenda will blow against Dollar appreciation.

U.S. Federal Reserve Chair Jerome Powell's speech at the Jackson Hole Symposium proved supportive of investor sentiment and negative for the Dollar in this regard, as no clear timing on when the Fed would taper its asset purchase programme was provided.

But the real blow to Dollar bulls was Powell's warning there would be no rush to raise interest rates once the programme had finally ceased.

For the Dollar to appreciate meaningfully markets will want to see strong incoming economic data that reinforces the view that the Fed can proceed with tapering and then eventually interest rate hikes.

Above: GBP/USD picks up fresh momentum on the ADP miss.

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"The FX market remains focused on the US macro landscape. Here, investors continue to push the dollar weaker in the aftermath of Powell's underwhelming performance at last week's Jackson Hole Symposium," says Ned Rumpeltin, European Head of FX Strategy at TD Securities.

With the U.S. being a key driver of foreign exchange more generally, all eyes fall on Friday's release of non-farm employment data where a strong reading could once again boost the Dollar at the expense of the Pound and Euro.

The consensus expectation is for a print of 638K to be released.

A disappointing reading could however reaffirm those trends sparked by Powell's Jackson Hole speech; namely a weaker Dollar and outperforming Euro, with the Pound somewhere in between.

The outcome of the reading should feed into market expectations as to when the Fed will go ahead and taper asset purchases.

"A tapering announcement still seems likely this year," says Rumpeltin, "our expectation for very disappointing US employment report should dash any remaining hopes of an early move."

"Against this backdrop, the USD is weaker against the spectrum of G10 and major EM currencies," he adds.