GBP/USD Rate in Attempted Recovery of 1.22 after U.S. Labour Data 

"Much of the recovery in GBP/USD from early November is a function of a weaker USD" - Rabobank. 

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The Pound to Dollar exchange rate (GBP/USD) made another attempt at recovering above 1.22 in midweek trade after official data suggested growth in U.S. employment costs moderated last quarter and that productivity picked up in labour market outcomes that would likely be welcomed by the Federal Reserve (Fed). 

Productivity of employees in the non-farm sector rose by 0.8% during the third quarter and not the 0.3% initially reported, the Bureau of Labor Statistics said on Wednesday, after additional information suggested that output per hour had risen faster than the number of hours worked by employees over the period.

Employee output rose by 3.3% last quarter while the number of hours worked ticked higher by a lesser 2.5%, meaning that productivity and competitiveness of the non-farm sector improved in a third quarter outcome that would be disinflationary if sustained over a longer period. 

Last quarter's moderation of growth in unit labour costs, which owes itself in part to the improvement in productivity, could also be expected to be disinflationary if sustained for a longer period and so would also likely be welcomed by the Fed.

"Unit labor costs in the nonfarm business sector increased 2.4 percent in the third quarter of 2022, reflecting a 3.2-percent increase in hourly compensation and a 0.8-percent increase in productivity. Unit labor costs increased 5.3 percent over the last four quarters," the Bureau of Labor Statistics said.

Above: Pound to Dollar rate shown at 15-minute intervals alongside Dollar Index and EUR/USD. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

Wages, salaries and employee benefits are some of the largest costs faced by employers and especially those in the breadwinning U.S. services sector, which makes them a significant influence on inflation and so relevant to the Federal Reserve interest rate outlook. 

Employee earnings have been rising at more than five percent on an annualised basis in recent months due partly to the still-low level of unemployment and a limited supply of labour, which is has gotten the Fed fearing for its inflation target and looking to soften up the jobs market using its interest rate.

The seemingly strong U.S. labour market and robust pay growth were among the reasons why Fed Chairman Jerome Powell reiterated last Wednesday that he expects U.S. interest rates will ultimately need to be lifted above the 4.75% level suggested in September's round of forecasts as the likely peak.

"It seems to me likely that the ultimate level of rates will need to be somewhat higher than thought at the time of the September meeting and Summary of Economic Projections," he said.

"It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done," he later added in concluding remarks at the Hutchins Center on Fiscal and Monetary Policy.  

Above: Pound to Dollar rate shown at hourly intervals alongside Dollar Index and EUR/USD. Click image for closer inspection. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.  

It's not clear how many others on the Federal Open Market Committee will agree with the Chair but new forecasts are set to be announced next week following a Wednesday interest rate decision that is expected to produce the smallest increase in U.S. borrowing costs since May.

Uncertainty over the new forecasts and what they will convey about the outlook for interest rates and the U.S. Dollar is one reason why Sterling might struggle to rise much beyond current levels just above the 1.22 handle. 

However, if sustained over the coming months, labour market developments like those detailed this Wednesday could ultimately enable the Fed to avoid lifting rates much higher and that kind of a bet by the market is one candidate explanation for why GBP/USD rallied in midweek trade. 

"Much of the recovery in GBP/USD from early November is a function of a weaker USD," says Jane Foley, head of FX strategy at Rabobank. 

"We expect choppy conditions in cable and for near-term activity to be mostly guided by movement in the USD," Foley writes in a Wednesday forecast review.

Above: Pound to Dollar rate shown at daily intervals alongside EUR/USD. Click image for closer inspection. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.