Sterling moved higher on Monday while the euro also gained ground as markets continued to react to weak U.S. employment data released on Friday. The payrolls report, which showed a headline -20,000 print and more than 100,000 in downward revisions, has reinforced expectations that the Federal Reserve will refrain from hiking rates further before year-end.
By 04:25 ET (08:25 GMT) GBP/USD was trading at $1.3503, up 0.07% on the day, while EUR/USD was at $1.1565, up 0.05%.
Francesco Pesole, an FX strategist at ING, highlighted the dovish market reaction to last week’s employment figures. "The first test arrived on Friday and came through clearly dovish and dollar-negative," he said, noting that the -20k payrolls number was compounded by more than 100k of downward revisions and that average job growth over the past three months stands at just 20k.
"Despite Friday’s repricing, 11bp are still priced in for September, 28bp for December and 40bp for April. There remains ample room for dovish repricing to harm the dollar if we are right about the Fed."
ING frames the run-up to the September 16 Federal Open Market Committee meeting as a five-event countdown, with Wednesday’s U.S. consumer price index release representing the next major test. The broker expects headline inflation to come in at 0.1% month-on-month, below the 0.2% consensus, and sees core CPI steady at 0.2%.
ING also noted that a softer-than-expected CPI print would bolster the argument for further dollar weakness. Fed hawk Beth Hammack is scheduled to speak later on Monday, while the rest of the U.S. data calendar for the day is light.
Market participants said the pound’s gains on Monday were not the result of UK-specific developments. Rather, traders described sterling as largely following broader dollar weakness, with no material domestic releases on the U.K. calendar for the day.
Pesole described the euro as "firmly dominated by the USD side of the equation," pointing to a relatively quiet stretch for euro-area domestic drivers after July’s key data releases, and an August schedule that is typically light for European Central Bank communication. He added that the ECB has already provided a "quasi-commitment" to a September rate hike.
ING sees scope for EUR/USD to push above the 1.160 level this week if U.S. CPI comes in soft, with the next technical resistance at the 200-day moving average around 1.1630. According to Pesole, short-term rate differentials have been the primary driver for EUR/USD, and the pair remains highly sensitive to developments in the Fed narrative.
ING’s baseline view remains that the Fed will not raise rates further this year, a stance that underpins its dollar-bearish bias. The broker said a sustained break above 1.1630 in EUR/USD would confirm a further leg higher for the euro, while a hotter-than-expected core CPI reading above the 0.2% consensus would be the principal upside risk to the dollar that could check declines in the greenback and limit gains for both sterling and the euro during the week.