Sterling pounces on dull dollar

JOLTs surprise leaves a mixed feeling behind; the euro is buoyed by positive data, and the pound hits a 10-month high.

George Vessey, UK FX & Macro Strategist

JOLTS surprise leaves a mixed feeling behind

Job openings in the US fell by 632 thousand to 9.9 million in February, reaching the lowest level since May 2021. The ratio of job openings per workers seeking work continued to fall from 2 to 1.86. This might be the first sign of cracks starting to appear in hard labour market data, which has so far defied the weakening of survey-based indicators. If so, bets for a Federal Reserve (Fed) pause and a subsequently weaker US dollar might be more justified.

US job growth has averaged around 351 thousand over the last three months, the highest rate going back to 1997 excluding the post-pandemic era. However, the contraction of the purchasing manager index for the US manufacturing sector and the sharp fall of small business hiring plans for the next three months suggest a less resilient labour market going forward. Over February and March, US job openings have fallen by 1.3 million, the second-fastest rate on record. Risk-assets initially reacted positively to the downside surprise of the US JOLTS data, but equities trimmed their gains and struggled to find traction in pre-European trading.

Shorter dated US government bond yields fell more than 100 basis points for the third straight day, with the US dollar selling off after the data release. However, with the retracement of stock markets, yields are also rising slightly this morning. So, does this confirm the assumption that bad economic data continues to be good for markets, as it decreases the likelihood of a rate hike from the Fed in May? Yesterday’s price action would say so, but today’s market moves seem to indicate that the situation is more complex. Markets are back to pricing in no interest rate change from the Fed in May, with a 55% probability.

Job openings are starting to come down. US job openings and S&P500 subindex for HR.

Euro buoyed by positive data

Data this morning showed that factory orders in Germany unexpectedly jumped 4.8% month-over-month in February, way above forecasts of a 0.3% gain. New orders rose for a third consecutive month and by the most since June of 2021. This follows a string of more upbeat data from Europe’s biggest economy this week, helping EUR/USD climb to its highest point since early February, but not enough to stave off a 2-week high in GBP/EUR.

Germany’s equity index, the DAX 40, climbed over 1% yesterday to a 14-month high, as investors also welcomed data showing Eurozone producer price inflation slowed more than expected in February. Meanwhile, a survey by the European Central Bank (ECB) showed that consumers cut their inflation expectations in February, while Germany’s trade data showed larger-than-expected increases in both exports and imports. German exports volumes remain volatile, but unexpectedly increased by 4% February from a month earlier, again beating market expectations of a mere 2.5% rise. However, North European ports are currently handling 20% less containers compared to last year and with leading indicators like South Korean and Taiwanese exports being down 13% and 17% on the year, the overall bias for global trade, especially European exports, continues to be highly negative going into the next two quarters.

From a currency perspective, although the euro is cheering the recent slew of upbeat data, improved risk sentiment and narrowing US-EZ rate differentials remain the two most important factors for the common currency. With markets pricing a Fed pause and for the ECB to hike twice more this year, a test of the key $1.10 handle could soon be in play, especially after GBP/USD broke $1.25 this week. Meanwhile, GBP/EUR remains stable around the €1.14 mark this morning but has broken north of its 50-day moving average in a sign of potentially more upside in the near future.

German exports beat expectations in February. German export growth (m/m).

Pound hits 10-month high

GBP/USD registered a new 10-month high yesterday, breaking above $1.25 for the first time since June, as the currency pair looks poised to record four weekly gains in a row. There were no obvious catalysts bar positive technical signals and an extension of global risk appetite supporting demand for riskier assets like equities, which the pound positively correlates with.

Sterling has become the best-performing developed market currency so far in 2023, the biggest beneficiary of markets rates repricing this year, with the US dollar continuing to be hurt by expectations that the end of the US rate-hiking cycle is drawing closer and the turmoil in the banking sector appears to be contained to the US. Meanwhile, the unexpected jump in the annual rate of UK consumer price inflation from 10.1% in January to 10.4% in February, and the stickiness of services inflation, has boosted bets of another 25-basis point hike by the Bank of England (BoE) in May. Markets are currently not pricing in rate cuts this year, whilst the Fed is expected to cut by 100 basis points over the next twelve months. Meanwhile, the pound’s typical trend of appreciation in April is attributed to dividend payment season & related repatriation of offshore revenues on the part of FTSE companies, so further gains may be on the cards, especially as GBP/USD has closed above a new 2023 high this week.

Looking ahead, despite the optimism amongst economists that the UK will avoid recession this year, many economic indicators still suggest otherwise, with UK consumer confidence, industrial production, the OECD’s leading indicator and the spread between 10-year and 2-year gilt yields still all suggestive of recession. Will $1.25 prove to be the top end of a new trading range or will the pair end its longest ever stint below $1.30?

How long will GBP/USD remain under $1.30 this time? Number of consecutive days under $1.30.

GBP/USD records hits new cycle high of $1.25

Table: 7-day currency trends and trading ranges

7-day currency trends and trading ranges.

Key global risk events

Calendar: Apr 03 -07

Key global risk events calendar.

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.

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