A Recovering Sterling

After beginning the past week at near record lows, the pound mounted a recovery, while the US dollar completed a round-trip to finish lower that it started in most currency pairs.

The UK government’s decision today to U-turn over removing the top rate of tax today, along with the Bank of England’s dramatic gilt market intervention, capped off the recovery for sterling.

Dramatic central bank intervention was a theme of the month, with the BOJ (Bank of Japan) taking decisive action the previous week.

Over the past seven days, GBP/USD rose over 2.7%, and against the New Zealand, Australian and Canadian dollars was up 5.5%, 4.9% and 4.4% respectively, regaining ground from previous losses on the back of the government’s misfiring budget.

GBP also recovered ground lost against the Japanese yen and Swiss franc.

As for the dollar, it softened in part due to the weak gross domestic product (GDP) figure on Thursday, which showed the economy shrank 0.6%.

Against the euro, the dollar weakened from 0.964 to 0.981, while against GBP it retreated from 1.0528 to 1.1209.

The UK GDP figures were mixed, with a surprise 0.2% GDP reading for the second quarter, revised up from -0.1%, alleviating fears that the UK was in recession, though growth remained insipid.

Week ahead

For the coming days, the major macroeconomic risk event is Friday’s US non-farm payrolls report, while a number of Fed speakers will be flexing their jaws.

NFP numbers on Friday from the US Bureau of Labor Statistics will reveal how many jobs America created in September, how that affected the unemployment rate and what wage growth is doing.

A month ago we learnt that August saw 315,000 jobs added, which was below the 12-month average of 495,000 and left the headline unemployment rate at 3.7%. The tight labour market led to average hourly wages growing 5.2% on the year, which was a slower pace than seen earlier in the year.

Around 250,000 new jobs are forecast to have been added for September.

If unemployment stays low and wage growth stays firm, then the US Federal Reserve is likely to keep raising interest rates and maintain its plans for quantitative tightening.

With the Fed having already jacked up interest rates from 0.25% to 3.25%, their highest level since 2008, and ahead of many other major economies, this has driven the dollar’s strength in recent months.

The market is pricing in further interest rate increases to 4.50% or even higher by May next year.

Before we get to Friday, the start of the month of October means we get lots more macro data, with new purchasing managers index (PMI) manufacturing reports for US, EU, UK and other major economies on Monday, along with US ISM manufacturing data.

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Key dates this week:

Monday also includes the Eurogroup meeting of finance ministers, discussing the economic situation in the single currency area.

Wednesday brings services PMI data for the same big economies. along with the US ADP employment report and US ISM services numbers.

Thursday is construction PMI data, less important for currency markets, while EU retail sales and US initial jobless claims have the capacity to move markets.

Friday Along with the NFP, there is also an EU leaders summit, a speech by Bank of England rate-setter Ramsden.