Higher Bar For A Weaker Dollar

GBP/USD drops to under $1.3200

GBP/USD extends its losing streak for the third consecutive day, trading under $1.3200 during the Asian session on Thursday. The risk-sensitive GBP/USD pair receives downward pressure due to the safe-haven flows amid escalating Middle-East tensions.

The improved US Treasury yields are supporting the US Dollar and undermining the GBP/USD pair. The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against its six major peers, continues to gain ground for the fourth successive session. The DXY trades around 101.80 with 2-year and 10-year yields on US bonds standing at 3.65% and 3.79%, respectively.

On the data front, the ADP US Employment Change reported an increase of 143,000 jobs in September, exceeding the anticipated 120,000 jobs. Furthermore, annual pay increased by 4.7% year-over-year. The total number of jobs added in August was revised upward from 99,000 to 103,000.

The Bank of England has been advocating a cautious approach to reducing interest rates, considering the still-high inflation in the services sector and relatively robust economic growth. In its quarterly statement released on Wednesday, the BoE's Financial Policy Committee (FPC) noted that “risks to UK financial stability are broadly unchanged since June.”

No Major Data

Can break below $1.1000 soon

Consensus is building rapidly around an October ECB rate cut. Yesterday, Isabel Schnabel – who at some points was considered the hawks’ “spokeswoman” – admitted that the ECB “cannot ignore the headwinds to growth”, especially given the progress on disinflation. This could be a sign that the hawks are throwing the towel on the October debate, and will accept another cut after the lower-than-expected CPI figures earlier this week.

The 2-year EUR swap rates are down 40bp since the start of September, and some 10bp over the past week, as 50bp of easing is priced in by year-end, with an October cut now fully expected. The Euro can no longer count on a supportive short-term rate differential, and a EUR:USD 2-year swap rate gap at -110bp is consistent with EUR/USD back at $1.1000, or slightly below that.

There is no key data or ECB speakers today. Barring soft US data or an oil correction, EUR/USD can test $1.1000 before the US payrolls.

Data: No Major Data

On solid ground

The most noticeable effect for FX has been a stronger Dollar, although yesterday’s price action seemed to default back to trading the US macro story. The stronger-than-expected ADP employment figures sent the USD 2-year swap rate back to 3.40%, some 13bp above last week’s levels. The pricing for year-end Fed funds continues to largely embed a 50bp cut in either November or December, meaning room for further re-alignment with the Fed’s less dovish rhetoric and consequently upside risks for the Dollar. Markets sense that the bar for a Dollar-negative reaction to US data today and tomorrow is probably higher after Fed Chair Jerome Powell’s recent pushback against 50bp reductions.

Looking at today’s data, ISM services may need to head back below 51.0 (consensus for a slight increase to 51.7) and jobless claims rebound to 230k to prompt a material USD correction. Unless market nerves on Middle East tensions ease, and oil corrects lower, the Dollar may retain decent momentum into tomorrow’s payrolls. The other release of the day is durable goods orders, and the Fedspeak calendar includes Jeff Schmid and Neel Kashakari, both hawkish-leaning FOMC members.

Data: 15:00 ISM Services PMI