Currencies in Flux: U.S. Jobs, Euro Inflation, and Sterling Resilience.

• U.S. Jobs Data Impact: October jobs report is expected to show slower payroll growth (100k) with unemployment potentially rising to 4.2%, which could mildly weaken the dollar as markets adjust expectations for Fed rate cuts.
• Election and Dollar Strength: Despite potential dollar softening from jobs data, a significant correction is unlikely ahead of the U.S. election, as markets may overlook weaker payrolls due to recent hurricane disruptions.
• Euro Rally on Inflation: Higher-than-expected Eurozone inflation (2.0%) has led markets to adjust expectations toward a more hawkish ECB stance, making EUR/USD look overvalued above 1.08 as U.S. election nears.
• Sterling’s Budget Reaction: Following the UK budget, gilts and sterling saw volatility, but no signs of 2022-style panic emerged; the sterling adjustment reflects inflation and BoE rate expectations rather than crisis-driven selloffs.
• Outlook for GBP/USD: The pound may stabilize around 1.28 by Election Day, supported by high short-term swap rates, despite a near-term dip from adjustments to increased borrowing projections.

USD: Gauging the Hurricane Impact on Payrolls

Today, the U.S. releases its October jobs report. Analysts expect nonfarm payroll growth to slow to 100,000, with unemployment likely steady at 4.1%. Our economist agrees with the payroll forecast but anticipates a slight uptick in unemployment to 4.2%. Should our call be accurate, this may weigh modestly on the dollar as prior strength priced from the last report unwinds. This could lead the market to adjust its view, leaning toward a potential 50-basis-point Fed rate cut by year-end.

Still, a major dollar pullback seems unlikely, given the proximity to the U.S. election. There’s also a chance markets (and the Fed) will discount softer payrolls due to temporary job losses from recent extreme weather events. However, unemployment trends are less likely to be swayed by these factors, which could have longer-term market significance.

This week, the dollar’s rally against the euro softened, with stronger eurozone data playing a role, though it remains supported against high-beta currencies exposed to Trump hedges. We could see these hedges increase once the jobs report passes, prompting a rotation into the dollar amid anticipated U.S. election-driven volatility.

On the economic docket, the U.S. ISM manufacturing index is expected to edge up slightly from 47.2 to 47.6, with a small bump in the employment component, likely drawing some attention.

EUR: A Bit Expensive

Eurozone inflation estimates for October showed an uptick to 2.0%, tilting market expectations toward a more hawkish ECB. The OIS market now prices in 58 basis points of ECB easing for December and January, although the chance of a smaller move in December has decreased to 22%.

With no ECB speakers until Monday and eurozone markets partially closed for a holiday, euro activity may be slightly muted. EUR/USD currently looks stretched in the upper half of the 1.08–1.09 range, and absent a push from U.S. jobs data, we see a potential dip to 1.0800 heading into the U.S. election, in line with a broader rate gap favoring the dollar.

GBP: Resilient Despite Bearish Sentiment

Following the UK budget announcement on Wednesday, the market reaction has evolved. Sterling initially saw a mild response, but then gilts and sterling came under selling pressure, though GBP has since stabilized. Gilt yields settled at 4.45% yesterday, down from a peak of 5.53%.

Despite increased borrowing expectations, this scenario differs from the 2022 mini-budget turmoil. While the market anticipates a rise in borrowing, planned tax hikes help temper concerns about unfunded spending, and UK pension fund leverage remains well below 2022 levels, minimizing panic risks. Rather than a disorderly selloff, the current sterling-gilt dip appears to be a repricing driven by higher inflation and Bank of England expectations, as well as an adjustment to increased borrowing needs.

This type of yield rise isn’t favorable for sterling, but a disorderly depreciation seems unlikely. With short-term GBP rates bolstered by the BoE’s recent positioning (now only one rate cut projected in 2024), we expect rate differentials to soon provide GBP support. We maintain our target of 1.28 for GBP/USD by U.S. Election Day.