GBP/USD trades flat despite soft US jobs data

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The British Pound (GBP) struggles for direction against the US Dollar (USD) on Friday, with GBP/USD consolidating after a short-lived spike following weaker-than-expected US labor market data. At the time of writing, the pair is trading around 1.3362, on course for a third straight weekly decline.

GBP/USD remains range-bound, heading for a third consecutive weekly loss.
Weak US NFP fails to dent the US Dollar as safe-haven demand persists.
Markets scale back Fed and BoE rate-cut expectations.

Despite the disappointing data, the figures did little to weaken the USD, as investors continued to favor the Greenback as a safe-haven asset amid the ongoing conflict between the United States and Iran.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 99.10, up nearly 1.50% so far this week.

The US Nonfarm Payrolls (NFP) report showed employment fell by 92K in February, sharply missing expectations for a 59K increase. Meanwhile, January’s reading was revised lower to 126K from 130K. The Unemployment Rate edged higher to 4.4% from 4.3%.

The weak US jobs data was largely overshadowed by escalating geopolitical tensions in the Middle East as traders weigh the potential inflationary impact of rising Oil prices.

As inflation risks mount, traders are growing increasingly cautious that central banks may need to keep interest rates higher for longer, tempering hopes for near-term rate cuts.

Markets now price only a 20-30% chance of a 25 bps Bank of England (BoE) interest rate cut in March, down from around 80% before the conflict. The repricing is lending modest support to the Pound, limiting follow-through selling in GBP/USD.

Meanwhile, traders have also trimmed expectations for Federal Reserve (Fed) rate cuts, according to the CME FedWatch Tool. Markets are now nearly certain that the Fed will keep interest rates on hold at its March meeting, while the probability of a June rate cut has fallen to around 35% from roughly 45% a week ago.

San Francisco Fed President Mary Daly warned that risks are emerging on both sides of the Fed’s mandate, noting that the “job market is vulnerable.” She emphasized that policymakers need to remain patient, saying the Fed must “be steady in the boat while we collect more information.” Daly added that whether rising Oil prices delay rate cuts will depend on “how long the disruption lasts.”

Traders also digested the latest US Retail Sales data. Retail Sales declined 0.2% MoM in January, compared with expectations for a 0.3% drop, following a flat reading in December. The Retail Sales Control Group, which feeds directly into GDP calculations, rose 0.3%, while Retail Sales excluding Autos remained unchanged at 0%.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.