GBP/USD: Will US Jobs Report Boost The Dollar?


The pound ended Thursday at approximately the same level versus the US dollar that it had started. The pound US dollar exchange rate briefly spiked up to a high of US$1.3161, before falling back to close at US$1.3110.

The pound continued to show resilience in the previous session despite few signs of a break through with Brexit and rather dismal consumer confidence data. Even though Parliament voted to send Theresa May back to Brussels to renegotiate the Irish backstop arrangement of her Brexit deal, Brussels have stood firm in their position. They are not open to re- negotiation. Instead Theresa May is trying a new tactic, attempting to woo members of the UK opposition party with promises of more rights for workers. Her plan is to win sufficient Labour support to help her deal through.

Adding to the Brexit gloom on Thursday was a low consumer confidence reading. Consumer confidence is at an 18-month low. It has been dragged down by worries over Brexit and increasing concerns over the health of the global economy. The weak reading damaged demand for the pound. When consumers lose confidence they spend less. Ad news for the economy.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

Today investors will look towards UK Manufacturing PMI data for clues as to how the UK economy is holding up. Analysts expect manufacturing activity to have slowed slightly in January after a stronger end to 2018, thanks mostly to stockpiling ahead of Brexit.

Dollar Stable Despite Fed’s U-Turn

The dollar stabilised in the previous session after its heavy Fed inspired sell off. Earlier in the week, the Federal Reserve had shocked dollar investors with a dramatic change of tone. The Fed signalled to market participants that it would be putting rate hikes on hold. Only six weeks earlier the Fed had signalled that it intended to raise interest rates twice in 2019. The abrupt change interest rate hike expectations sent the dollar lower.

Today investors will look towards the US Labour Departments jobs report. Analysts are expecting the report to show that 174,000 jobs were created in January. They also expect average wages to have increased 0.3% month on month and 3.2% year on year. Given that the private payroll report the ADP report came in stronger than what analysts predicted and that there is a very strong positive correlation between the ADP report and non-farm payrolls, today’s report could be stronger than forecast. This would boost the dollar.

How does the non-farm payroll (NFP) affect the US dollar?
It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes up the currency’s worth.

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