British Pound trims losses against US Dollar after NFP-driven volatility
- GBP/USD claws back part of its post-NFP losses as the US Dollar trims its initial gains.
- Strong US jobs data lifts Fed rate-hike bets for the September 15-16 meeting.
- Attention shifts to US CPI and PPI data for clearer clues on the Fed’s next move.
GBP/USD recovers part of its initial drop on Friday after stronger-than-expected United States (US) employment data briefly lifts the US Dollar (USD). The pair fell to an intraday low of 1.3482 immediately after the release before rebounding. At the time of writing, GBP/USD trades around 1.3512.
US Nonfarm Payrolls (NFP) increased by 162K in August, almost three times the market forecast of 56K. July’s reading was revised to a gain of 21K from the previously reported 23K decline, while the Unemployment Rate held steady at 4.1%.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 99.11 after rising as high as 99.39 in response to the employment report, but holds above the more than one-week low of 98.83 touched on Thursday.
The short-lived decline in GBP/USD suggests traders are not fully convinced that the stronger employment figures will be enough to secure a Federal Reserve (Fed) rate hike this month. Recent comments from Fed officials indicate that policymakers are more focused on restoring price stability, making next week’s Consumer Price Index (CPI) and Producer Price Index (PPI) reports crucial for the September decision.
Recent inflation figures have shown some moderation. Fed Governor Christopher Waller said on Thursday that he is “finally seeing some signs of disinflation” and that the current interest-rate setting could bring inflation back to the Fed’s 2% target. However, Waller added that he would consider a September rate hike if the August inflation data comes in hot.
The strong jobs report has nevertheless pushed rate hike expectations higher. According to the CME FedWatch Tool, markets now see around a 60% chance of a 25-basis-point (bps) increase at the September 15-16 meeting, up from roughly 50% before the NFP release.
On the UK side, hawkish remarks from Bank of England (BoE) Chief Economist Huw Pill provide some support to the Pound Sterling (GBP). Pill reiterated his preference for raising the Bank Rate to 4%, although markets largely expect the BoE to leave rates unchanged at 3.75% later this month.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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