Pound Sterling Takes a Hit: More Weakness on the Horizon for GBP, USD, and EUR.

• GBP Decline: Pound Sterling dropped sharply after Bank of England Governor Andrew Bailey hinted at a more aggressive approach to interest rate cuts, signaling further weakness ahead.
• Bailey’s Shift: Bailey’s recent dovish comments contrasted with his earlier cautious stance, influenced by ECB’s Christine Lagarde suggesting further Eurozone rate cuts.
• USD Outlook: Economists expect lower US payroll numbers and slightly higher unemployment, which could trigger a dollar correction, though rising oil prices are still supporting the currency.
• Geopolitical Impact: Rising oil prices, driven by concerns over potential US strikes on Iran’s oil facilities, are influencing FX, rates, and commodities markets.
• EUR Weakness: EUR/USD remains under pressure due to less favorable rate differentials, EU budget instability, and expectations of further rate cuts from the ECB.

GBP: Bears Eye Further Decline in Pound Sterling After Sharp Drop

The Pound Sterling’s steep decline against the Euro has strengthened bearish sentiment, with analysts predicting more losses ahead. Many foreign exchange experts argue the Pound is overvalued against both the Euro and Dollar, seizing on Thursday’s sharp drop to forecast further weakness. Sterling tumbled following comments from Bank of England Governor Andrew Bailey, who hinted that if inflation continues improving, the Bank could adopt a more “activist” stance in cutting interest rates. This shift in tone marked a transition from caution to optimism about potential rate cuts, triggering a market adjustment that weighed on the Pound.

Nick Andrews, Senior FX Strategist at HSBC, noted, “We’ve always believed that once the BoE feels more secure about inflation, it will signal a more aggressive rate-cutting cycle. Bailey’s latest comments clearly move in that direction.” Interestingly, Bailey’s remarks come just two weeks after he advocated for a cautious approach to rate cuts. There hasn’t been any significant new inflation data from the UK to explain Bailey’s shift in tone. Instead, it appears that the stance of European Central Bank (ECB) President Christine Lagarde, who signaled the likelihood of another ECB rate cut, has influenced Bailey’s outlook.

USD: Dollar Faces Near-Term Correction Amid Payroll and Oil Price Pressures

The market consensus for the US payroll report is 150k, with unemployment expected to hold steady at 4.2%. However, our economists anticipate a lower payroll figure of 115k and a slight uptick in unemployment to 4.3%, which could pave the way for a correction in the dollar. Still, higher unemployment may be necessary for the markets to fully shift to a dovish outlook on Federal Reserve policy. In the near term, buying on dollar dips could prove valuable, as the dollar continues to gain support from rising oil prices. The recent surge in crude oil prices was driven by President Biden’s remarks about considering strikes on Iran’s oil infrastructure in response to the Israel conflict, surprising the market and potentially shaking up commodities.

Today’s market reaction to US job data will likely be intertwined with geopolitical tensions and commodity market spillovers into foreign exchange, rates, and equities. Even if geopolitical risks subside and oil prices stabilize, a significant disappointment in US economic data would likely be needed to reignite bullish sentiment in USD. Our rates team suggests that 10-year Treasuries could return to 4.0% if we see a consensus payroll figure today.

EUR: Euro Under Pressure as EU Budget Woes and Rate Differentials Persist

In the near term, we maintain a moderately bearish outlook on EUR/USD, even as a slight increase in US unemployment may provide temporary relief. The Euro is still vulnerable due to weaker rate differentials, unstable risk sentiment, and turbulence in the EU budget season. If EUR/USD breaks the 1.1000 support level, the downward correction could extend toward 1.09 quickly.

While the Eurozone calendar lacks market-moving data today, several European Central Bank officials are set to speak. With Isabel Schnabel adopting a dovish tone earlier this week, we could see additional ECB hawks succumbing to dovish pressures, signaling the likelihood of an October rate cut. Meanwhile, in the UK, GBP has seen significant unwinding of long positions following Bailey’s dovish comments. Last week’s CFTC data showed that the Pound was the most overbought G10 currency, with 35% of open interest in net-long positions, indicating there could be more room for further downside unless hawkish BoE communication reverses the trend. We still believe GBP/USD could reach 1.30 in the coming weeks.