U.S. Job Report Poses Further Pain for GBP/USD

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Pound Sterling will come under further pressure against the Dollar if today's U.S. marquee job report comes in strong.

The Pound to Dollar exchange rate (GBP/USD) will register its biggest weekly loss since July 2023 if Friday's all-important U.S. jobs report beats expectations.

If U.S. non-farm payrolls come in stronger than the market is expecting (140K) the Dollar's rebound will gather steam as investors will fade expectations for another 50 basis point interest rate cut from the Federal Reserve before year-end.

"We believe that the USD will follow the path of US rates and UST yields in the wake of the release. In particular, any positive data surprises could encourage rates investors to pare back their Fed rate cut expectations and thus give the USD’s relative rate appeal a boost across the board," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

Divergence in U.S. and UK interest rate expectations is the theme of the week: GBP/USD fell 1.10% on Thursday after the Bank of England's Governor, Andrew Bailey, hinted that the Bank might accelerate the pace at which it cuts the UK's base rate.

U.S. rate expectations are meanwhile heading in the opposite direction. The GBP/USD selloff was fuelled later in the day following the release of an above-consensus U.S. ISM non-manufacturing PMI. The data showed America's service sector expanded again in September, while price pressures rose, which is inconsistent with a rapid reduction in interest rates.

A bad week for Sterling 'bulls' could be about to get worse if the jobs report accentuates the divergence in prospects for UK and U.S. interest rates.

"Today’s data could attract considerable attention given that the September and October NFP could decide whether the FOMC delivers another jumbo rate cut on 7 November," says Marinov.

Marinov says the Dollar's rally could be "pronounced" if stock markets baulk at a stronger-than-forecast jobs report.

"To the extent that any resultant tightening of US financial conditions is made worse by weaker risk sentiment on the back of escalating geopolitical tensions, the USD gains could be particularly pronounced vs risk-correlated currencies," he says.

Of course, there is the chance the labour market comes in soft, and Crédit Agricole thinks any downside surprises could hurt the USD’s appeal, especially if investors start pricing a jumbo cut in November.

If this is the case, Pound-Dollar will pare back the week's losses to less than 1.0%.