Market Jitters: Pound Faces Pressure Amid Rate Cut Speculation and U.S. Jobs Report.

GBP: The Pound to Dollar exchange rate could stay under pressure due to potential interest rate cuts and the upcoming U.S. jobs report on Friday. The Bank of England’s decision this week is crucial for the Pound, with the market divided 50/50 on whether a rate cut will happen. This uncertainty makes the market highly sensitive to the outcome, likely leading to increased volatility. Our Week Ahead Forecast suggests expecting near-term weakness as traders brace for this potential volatility. This could see the Pound-Dollar exchange rate dip towards 1.28 in the short term, especially if global equity markets continue to struggle. Last week’s stock market selloff put pressure on the Pound-Dollar, highlighting the exchange rate’s sensitivity to broader market sentiment. We anticipate the exchange rate might drop to around 1.2760, aligning with a 38.2% Fibonacci retracement of the April to July rally and bringing the 50-day moving average (1.2780) into play. The June pullback was halted by the 50 DMA, which then supported the uptrend. Currently, there’s just over a 50% chance of a rate cut on Thursday. The recent weakness in the Pound reflects rising expectations for a cut, up from 40%. Kamal Sharma, an analyst at Bank of America, notes, “going into the rate meeting, we see risks tilted towards GBP weakness if the BoE cuts. Two factors indicate this: crowded IMM GBP long positions and increased market volatility, which historically hurts high beta currencies.” The market has built a record-long position on the Pound recently, betting on further outperformance. However, this crowded positioning could lead to a significant pullback if expectations are disappointed. “Even with a hawkish cut, we believe markets might sell GBP as positions are reduced,” Sharma adds. A ‘hawkish cut’ is when the Bank cuts rates but signals that further cuts are not guaranteed and depend on future data.

USD: The U.S. Dollar Index remains steady below 104.50 in the European morning after ending the week almost unchanged. Meanwhile, U.S. stock index futures are trading positively, and the 10-year U.S. Treasury bond yield stays below 4.2%. The Federal Reserve will announce its monetary policy decisions on Wednesday following the July 30-31 meeting. Throughout the week, investors will closely watch U.S. employment-related data releases. The Dollar will be in focus on Friday with the release of the U.S. jobs report. If the data falls short of expectations, the market will likely price in more policy easing from the Federal Reserve, which could weigh on the Dollar. July non-farm payrolls are expected to come in at +178k, with the unemployment rate holding at 4.1%, following a stronger-than-expected +206k in June. Donald Trump and his running mate J.D. Vance’s desire for a weaker U.S. dollar highlights the confused and potentially destabilizing economic elements of Trump’s re-election platform. In a Bloomberg interview, Trump claimed the U.S. had a currency problem, saying, “The depth of the currency now in terms of the strong dollar, weak yen, weak yuan, is very massive,” and added that a strong dollar was a “tremendous burden” on U.S. companies trying to export. Vance also supports a weaker dollar, arguing that the dollar’s status as the world’s reserve currency acts as a subsidy for U.S. consumers but a tax on U.S. manufacturers. He said, “I know that the strong dollar is a sacred cow of the Washington consensus, but when I look at our economy and see our mass consumption of mostly useless imports and our hollowed-out industrial base, I wonder if the reserve currency status also has some downsides.” Former Trump economic advisers like Robert Lighthizer are reportedly exploring ways to devalue the dollar, possibly through a new Plaza Accord with other countries, using tariff threats as leverage.

EUR: EURGBP has been rising this week due to negative euro data. The FTSE also saw a strong rebound, suggesting the market may be anticipating a rate cut. PMIs were lower than expected, indicating continued contraction in the manufacturing sector. German data was particularly weak, highlighted again by the Ifo Business Climate Survey release. Despite this, the euro has remained steady and even gained against four of the G7 currencies. This resilience is likely because the euro is priced for two cuts this year. While this week’s data supported the view of another cut, it wasn’t enough to convince markets of a third. Inflation remains stubborn, so the economy would need to significantly decline before the focus shifts from controlling inflation to stimulating growth. If there is encouraging news on inflation in the coming months, the ECB might cut a third time, but this remains uncertain, and the euro could stay stable for now. EURGBP seems comfortable in a 0.84-0.85 range, and EURUSD is stable between 1.08 and 1.09.