US employment data helps relieve pressure on the Fed

USD

Non Farm Payrolls employment report was released on Friday and the data showed an increase of 315,000 jobs last month after surging 526,000 in July. The disappointments are with the Average Hourly Earnings which rose 0.3% compared with expectations of 0.4% and the Unemployment Rate which missed predictions of 3.5% against 3.7% actual. However, the stronger-than-expected Participation Rate could go some way towards explaining the dissatisfying data given the increase in the number of people joining the labour force last month.

Despite mixed data, traders see a 75% chance of a third straight 75 basis points interest rate hike in September and expect rates to peak at 3.90% in March 2023.

US yields are under pressure as well, with the two-year US Treasury yield down over 2.57% at the lows of 3.406%.

Given that the data from the US has continued to help the dollar go from strength to strength, this has eased some pressure on the Federal Reserve. The central bank is looking to cool down labour demand and the overall economy to bring inflation back to its 2% target.

GBP

Sterling did not enjoy its most productive week, losing ground against the euro and dollar. As August came to an end GBP posted its worst monthly loss since late 2016 and this continued into early September. The pound briefly slid to as low as the 1.14 mark, a new rock-bottom since March 2020 when COVID-19 hit markets.

The prospect of the pound hitting parity with the US Dollar is becoming ever less outlandish. While the UK faces many challenges experienced by other countries this has been compounded by its own unique set of problems. Growth is set to slow further in the coming months. According to the British Chambers of Commerce’s forecasts, the UK is already in a recession with inflation predicted to hit 14% later in the year.

The race for the next Prime Minister comes to a halt today with the announcement of a new leader expected around 12h30 GMT. The current frontrunner Liz Truss and her allies have made the Bank of England a “political punching bag”, dragging Governor Andrew Bailey’s handling of the aftermath of the pandemic into the limelight. Ms. Truss has been making waves in the election race as her plan for the BoE is seen as a threat to the pound and British bonds – Truss’ thoughts on how to manage the BoE are adding to a mounting list of threats to the value of the pound and UK government bonds.