Pound-Dollar Rally Now Eyes 1.28

• Initial jobless claims: 262K vs. 250K expected and 262K previously
• Philadelphia Fed Manufacturing Index (Jun): -13.7, -13.5 exp., -10.4 prev.
• Retail sales (MoM May): 0.3%, -0.1% exp., 0.4% prev.
• Industrial production (MoM May): -0.2%, 0.1% exp., 0.5% prev.

Above: GBPUSD at five-minute intervals.

The Pound to Dollar exchange rate (GBPUSD) rose to a new 14-month high at 1.2794 on Friday as a short-term rally extended following the release of a mixed set of U.S. economic data which failed to convince markets the Federal Reserve was certain to raise interest rates in July.

U.S. jobless claims rose by more than analysts were expecting and industrial production numbers undershot, retail sales meanwhile proved stronger than the consensus was looking for.

"The USD is ending the week on a broadly weaker tone despite the Fed’s hawkish pause, as reflected by the dollar index (DXY) dropping back to the edge of 102. This is probably the main reason behind the further GBP-USD strength close to 1.28," says Roberto Mialich, FX Strategist at UniCredit.

"USD took a battering against most of the G10 currencies yesterday," says You-Na Park-Heger, FX Analyst at Commerzbank. 

James Knightley, Chief International Economist at ING Bank, says the Federal Reserve’s 'hawkish hold' midweek suggests an inclination to hike again in July, but Thursday's mixed retail sales and manufacturing data fail to offer a clear steer.

"The grinding higher in jobless claims is perhaps the bigger story, but it probably won’t be enough to lead to a sizeable slowdown in payrolls growth to deter the Fed just yet," he says. 

GBPUSD rose to 1.2794 on Friday, its highest rate of exchange in 14 months. EURUSD was at 1.0955, its highest level since May 11.

The Federal Reserve on Wednesday left interest rates unchanged in response to ongoing evidence inflation in the U.S. is falling, but signalled it would likely raise rates again.

"Dollar bulls have seen their gains slip away, as the greenback reverses last night's gains. The Fed might be keen to suggest it's not on pause, but the market clearly believes otherwise," says Chris Beauchamp, Chief Market Analyst at IG.

"The Fed is in no rush with further rate hikes," says Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank. "The FOMC decision was certainly not USD negative, but nor was it a game changer, that would justify a complete revaluation of the greenback."

Yet inflation remains some way above the Fed's target and the Fed released guidance that suggested it believed a further two interest rate hikes were appropriate by year-end.

Markets appear reluctant to take this message on board, however, selling the Dollar and buying stocks, suggesting investors believe the Fed has ended its cycle.

The labour market is particularly important in this regard: once unemployment starts rising wage pressures will start easing, ensuring demand in the economy wanes and inflationary pressures subside.

Last week's jobless claims unexpectedly jumped to 261k from 233k, defying the market that was looking for a retracement back to 245k. This week's above-consensus reading of 246.75K forms a second consecutive negative surprise that is convincing investors the jobs market might be turning.

"We have the highest number of initial jobless claims since October 2021 with the job lay-off announcements pointing to jobless claims continuing to grind higher in the coming weeks and months," says Knightley.

Knightley adds that although demand for workers remains firm, the rising lay-offs mean we should anticipate the net gain in payrolls to moderate.

"Furthermore, there is a concern that we are losing well-paid, full-time jobs in the likes of the tech and business service sectors, and they are merely being replaced by lower-paid, part-time jobs in the leisure and hospitality sectors," he says.

Elsewhere, May industrial production fell 0.2% month-on-month versus the +0.1% consensus.

Retail sales rose 0.3% month-on-month, beating the -0.2% reading consensus was looking for. The control group (which strips out volatile components and better matches with broader consumer spending trends) came in at +0.2% as expected.

The data is simply not strong enough to shift the market's conviction a peak in U.S. interest rates is at hand, and this means an unwind in the Dollar can continue.

"The big picture is that policy rates, not just in the U.S., are moving close to their peak. This is one of the factors we see acting as a headwind to the safe-haven USD, supporting our H2 23 bearishness," says Daragh Maher, Head of Research for the U.S. at HSBC.