The GBP to USD exchange rate recovered to 1.4524 at the weekend, some 0.75% higher than where it opened its account for the day as markets fast cancel bets that the US Fed will raise interest rates in June/July.
The pound was the worst performing currency in the G10 complex for the week ending 3rd June having even fall against an undermined USD. The New Zealand dollar was by far the strongest performer of the week.
Nevertheless, the outlook remains constructive for the GBP/USD as the exchange rate once again successfully defended the support level at 1.44. This point has seen buying interest arrest GBP declines on multiple occassions since the start of May.
Indeed, the daily graphs have shown that throughout 2016 the GBP/USD has used the level as a fulcrum. What does this mean for the outlook?
It suggests that any weakness is unlikely to extend below 1.44 as a barrage of buy orders are peppered around this point.
It also tells us that should the pair break below here further declines to 1.40 are easily achievable and that the pair will struggle to break above here once more.
So those with impending GBP-USD payments take note of this level.
US NFP in Shocking Slump
The USD exchange rate complex saw notable selling pressure ahead of the weekend after the all-important US payroll data for May comes in well below analyst forecasts.
The headline non-farm payroll read at 38K - almost unbelievable really. Markets were forecasting a read of 164K.
To make matters worse the previous month’s reading was revised lower to 123K.
The headline numbers completely overshadowed all the other smaller prints, Average Hourly Earnings for example were a non-event at 0.2%.
For the dollar the big issue is what the data means for the US Federal Reserve.
The US currency has been in the ascendency through May as markets increased bets that the US economy was on a stable enough footing to justify an interest rate rise.
These bets will now be pared back.
“After a well below par result in April, Fed Chair Janet Yellen will be dismayed to see nonfarm payroll data sink further today. The significantly lower than expected figures couldn’t have come at a worse time, as the June FOMC meeting will take place without another major data release amid swirling rumours of another rate hike planned,” says Dennis de Jong, Managing Director at UFX.com.
- Marcus Bullus, trading director, MB Capital, comments:
"Mayday! Mayday! is precisely what the markets will be screaming after this frankly shocking non-farm payrolls number.
"It's the weakest number for six years and there's little doubt that it has hit the market for six.
"Coupled with ongoing Fed concerns around Brexit-led geopolitical risk, any prospect of a June hike has just been kicked firmly into the long grass.
- David Lamb, head of dealing at FEXCO Corporate Payments, comments:
"The Dollar bombed instantly on the back of this diabolical May non-farm payrolls report, the weakest since 2010.
"You certainly can't write it off but there's no doubt the greenback will have a question mark hovering over it for a while following this print.
"Even though the jobless rate came down, this was negated by a similar fall in the participation rate.
"The Verizon strike may have played a role in this number, but it was certainly not the major driving factor.
"There's something more fundamental going on in the US economy but right now it's hard to know what.
"We can safely say that a June hike is now off the cards, all the more so given the growing uncertainty surrounding the impact of a possible Brexit. The odds on a July hike have also just lengthened.
Earlier: We Were Pretty Complacent!
A read of what we wrote before the release reflects a sense of confidence that the NFP data would deliver a strong result:
We have had near-on a hundred months of solid employment reports, yet the Fed has responded just once with an interest rate rise.
Yes this has kept the dollar high, but until the Fed responds in a more aggressive fashion it is hard to see the dollar really gaining traction.
Indeed, what more must the economy do to convince Chair Yellen and her team that the economy can handle higher interest rates?
One answer could be wages - should wage growth beat expectations this month then the Fed could feel that inflationary pressures are in fact building up.
One of the Fed’s main mandates is to keep inflation contained, and signs that wage pressures are building will convince them that interest rate rises are need to ensure inflation does not overshoot their target in coming weeks and months.
“The key focus of the market will on wages rather than jobs,” says Boris Schlossberg at BK Asset Management. “The consensus view is that average weekly earnings will grow at 0.2% which will be in line with recent trend growth and will continue to show a positive 2.5% yeary path in wages.”
Schlossberg reckons that if the number beats the consensus view it should help boost the buck which has been under heavy selling pressure all week.
Markets remain skeptical of any possible Fed hike but a jump in wage growth would be just the data point that Fed needs to move ahead with its normalisation process and odds of June or July hike should rise markedly if this was to occur.
Should this happen then the pound / dollar exchange rate would be at risk of breaking lower.
“The GBP has stabilised after losing some 3 cents since Tuesday but the “bounce” has been distinctly muted and short-term price action looks weakish with Cable gains capped around 1.4460/65,” says Shaun Osborne, a currency strategist with Scotiabank.
“Loss of short-term trend support at 1.4485 (now resistance) and the 40-day MA (1.4454) suggest near-term downside risks towards 1.43.”
Meanwhile, technical strategists at Barclays say deeper declines could be expected. In a recent client note analysts warn that the recent sell-off on increased trading volumes endorses their bearish view on GBP/USD:
“We expect resistance in the 1.4670 area to cap a move towards 1.4330 and then lower towards the 1.4005 area.”