Dollar Rallies Against Pound Sterling as NFP Data Confirms September Rate Hike

The British pound closed the week on the back foot against the US dollar as US employment data was not bad enough to offset expectations for a much-anticipated September interest rate rise at the US Fed.

US non-farm's read at 215K, below the 223K forecst by analysts.

The pound to dollar exchange rate initially rallied on the news before suddenly dipping sharply - we believe the revision to the May - June (up by 14K) numbers may be behind the positive twist to trading patterns.

Furthermore - if you read our analyst briefings from before the release (see below) then you will note that most analysts were saying only a catastrophic miss would deter the Fed from that September rate hike.

At the time of writing foreign exchange markets are buying the US currency in anticipation of higher rates:

The pound to dollar exchange rate conversion (GBP/USD) is at 1.5493.

The euro to dollar exchange rate conversion (EUR/USD) is at 1.0880.

Be aware these are spot market quotes, your bank will subtract a spread when conducting payments. To get closer to the market consult an independent specialist, you could save up to 5% more currency.

Analysts are predicting a reading of 223K to be delivered, unchanged on the previous month. The unemployment rate is predicted to remain at 5.3%. Weekly hours are seen at 34.5.

What the Specialists are Saying

Harm Bandholz, Chief US Economist at UniCredit Research says today's data is a green light to a rate rise:

"The latest FOMC statement highlighted that the Fed in late July only wanted to see “some further” improvement in the labor market before being ready to finally start the normalization of short-term interest rates. And Atlanta Fed President Lockhart told the Wall Street Journal earlier this week that the bar for not moving in September is pretty high.

"As outlined above, there can be no doubt in our view that today’s employment report does indeed represent 'some further' improvement in the labor market – if not more more. It, therefore, further strengthens our view for the first rate hike in September."

Christopher Vecchio, currency analyst with FXCM's DailyFX, says:

"If there is a takeaway from today’s data, it may be that, yes, the Fed is looking more and more likely to raise rates in September. However, given low headline inflation readings and a lack of ‘break neck’ speed in the labor market, the first hike in September (or October or December for that matter) is likely to be an isolated event; the Fed will raise rates once then hold for some time thereafter.

"The liftoff path will be very gradual, and the Fed’s benchmark interest rates will probably peak at a lower level relative to prior economic cycles. Accordingly, the strength the US Dollar may derive from shifting rate expectations around today’s NFP report may only be limited at best."

What the Specialists Were Looking For Ahead of the Result

Roy Teo, currency strategist with ABN Amro thinks the next two non-farm payrolls will convince the FOMC to raise the Fed funds target range by 25 basis points to 0.25-0.50% next month. “As the Fed funds futures is only pricing in about 50% probability of a 25bp rate hike. We expect further gains in the USD in the coming months.”

Lloyds Bank, in a communication to clients, say:

“The US employment report is always seen as one of the key economic releases of the month. However, the FOMC’s statement that it wants to see “some further improvement in the labor market” before raising interest rates means that both today’s report and the next due in early September will receive even more attention than usual in the run up to the next FOMC meeting.

“FOMC member Lockhart, who is widely considered to be a ‘centrist’ , commented this week that he will probably vote for a rate rise in September unless the economic data deteriorates significantly.” 

Alastair McCaig at IG says:

“It is unlikely that today’s NFP figures will be good enough to generate a change in thinking about interest rate rises and bring the perceived September start date forward; however, a particularly bad set of figures still has the ability to push that date a little further down the road.

“Without the Greek conundrum to muddy the waters EUR/USD is poised to react solely to today’s data, and as one of the few catalysts around today it will likely get the lion’s share of attention too.”