GBP and EUR Surge as USD Falters.

• GBP Surge: The British Pound reached a new 2024 high against the U.S. Dollar after U.S. labor market data revealed a significant overestimation in job creation, prompting expectations of Federal Reserve rate cuts.
• Euro Strength: The Euro gained over 2.5% in August, breaking above the $1.10 level, driven by expectations of more aggressive U.S. rate cuts compared to the European Central Bank’s cautious approach.
• Dollar Decline: The U.S. Dollar continued its broad decline following FOMC minutes that indicated a September rate cut is likely, with uncertainty around whether the cut will be 25 or 50 basis points.
• Market Dynamics: The Dollar’s weakness is primarily due to growing market bets on a dovish Federal Reserve, with concerns shifting from inflation to the labor market.
• Currency Performance: The Swiss Franc emerged as the strongest currency, while the Euro and British Pound performed moderately, benefiting from the Dollar’s struggles.

GBP: The British Pound surged to a new 2024 high against the U.S. Dollar after a surprising report revealed a weaker-than-expected U.S. labor market, prompting potential action from the Federal Reserve. The Pound-to-Dollar exchange rate climbed to 1.31, its strongest since July 2023, after the Bureau of Labor Statistics admitted to overestimating job creation by 818K in the year leading up to March 2024. This revision boosted the best rate for international transfers above 1.3050. The Dollar slumped across the board, as market bets on Federal Reserve rate cuts increased, with the Fed closely monitoring labor market data for signs of weakness before deciding on rate adjustments. The currency pair’s divergence from its 100-day moving average reached 3%, marking the most significant deviation this year. As a result, GBP/USD could be more susceptible to a correction if UK economic data disappoints or U.S. data outperforms. The Dollar’s slide is driving the GBP/USD rally, with markets increasingly betting that the Federal Reserve will initiate a prolonged rate-cutting cycle in September, which would support stocks and weigh heavily on the Dollar.

EUR: The Euro is enjoying its best performance of the year against the Dollar, emerging as a big winner amid recent turmoil in global currency markets. After decisively breaking above the symbolic $1.10 level, the Euro has gained over 2.5% in August, setting it up for its best month since November. Traders, previously focused on the Yen’s surge following the Bank of Japan’s unexpected rate hike on July 31, are now taking notice. The $1.10 level has historically been difficult to surpass, and just a few months ago, some analysts predicted the Euro might fall to parity. Instead, the Euro is now the second-best-performing major currency against the Dollar this year, behind only Sterling. It has also reached its highest trade-weighted value on record, partly due to weakness in emerging market currencies. Although further gains against the Dollar are expected to be modest, they are notable as the Fed is likely to cut rates more aggressively than the European Central Bank, which may be constrained by persistent inflation in the service sector. “It’s a rate differential story,” says Commerzbank currency analyst Volkmar Baur. “Inflation is declining on both sides of the Atlantic, but the Fed is expected to move more aggressively, narrowing the rate spreads and strengthening the Euro.” The ECB, which cut rates in June, is expected to deliver at least two more 25 basis point reductions.

USD: The U.S. Dollar extended its decline overnight following the release of the Federal Open Market Committee (FOMC) minutes, which confirmed that most Fed members see a September rate cut as appropriate. However, the market reaction was muted, as this outcome was already largely anticipated by traders. The real uncertainty lies in the size of the rate cut—whether the Fed will opt for a modest 25 basis point reduction or a more aggressive 50 basis point cut. Current market pricing suggests a 35% probability of the latter. Attention is now turning to Fed Chair Jerome Powell’s upcoming speech at the Jackson Hole Symposium, where investors hope to glean insights into the Fed’s future decisions. However, Powell is unlikely to commit to a specific course of action, given that the Fed will have another round of key economic data, including CPI and Non-Farm Payroll (NFP) reports, before its next meeting. So far this week, the Dollar remains the weakest performer, struggling under expectations of an imminent rate cut. The Canadian and Australian Dollars are also under pressure, while the Swiss Franc has emerged as the strongest currency, followed by the New Zealand Dollar and Japanese Yen. The Euro and British Pound are positioned in the middle of the currency performance spectrum. GBP/USD had previously hovered between its 100- and 200-week moving averages before breaking above 1.3000 last month. Although it briefly fell back, buyers have found renewed strength as the Dollar continues to struggle. The focus is now on the 2023 high of around 1.3142. If buyers can break through this level, it could pave the way for further gains in GBP/USD. The current dynamics are driven by markets anticipating a more dovish Fed, convinced that inflation in the U.S. is under control, with concerns shifting to the labor market. Unlike the Bank of England, there is still uncertainty around a September rate cut, and this divergence is weighing down the Dollar across the board. The pace of rate cuts, rather than alignment among central banks, is now the key factor, and continued pressure on the Dollar could lead to further gains for GBP/USD and other Dollar pairs.