The pound finally found some breathing room yesterday, recovering part of this week’s losses against the dollar and strengthening against the euro. Stronger British growth provided some help, while softer US inflation temporarily took some of the momentum out of September’s dollar rally.
That relief only went so far. The Federal Reserve’s preferred measure of inflation rose less than expected in August, reducing expectations that policymakers will raise interest rates again this month. Longer-term US borrowing costs remained stubbornly high, however, and the dollar steadied again overnight close to its strongest level in two months.
Then came the complication. Private US employers added 90,000 jobs in September, more than double August’s revised increase and comfortably ahead of expectations. It is not the official employment report, but it was enough to ensure Friday’s much more important jobs figures still have plenty riding on them. Markets got their breather, not an all-clear.
And oil refuses to disappear from the story. Prices rose again yesterday as US-Iran negotiations struggled to make progress and fuel supplies remained tight. They have steadied overnight as Middle Eastern crude exports recover, helped by Saudi Arabia restarting loadings through its Red Sea route. The two forces are pulling in opposite directions, which is hardly ideal for central banks trying to work out where inflation goes next.
Britain’s own numbers provided the more cheerful part of the day. The Office for National Statistics revised second-quarter gross domestic product (GDP) growth up to 0.5% from 0.4%, while real household disposable income per person rose by 1% after falling at the start of the year. That is useful evidence of resilience, although expensive energy and high borrowing costs mean the Bank of England’s inflation problem has hardly gone away.
October therefore begins with the dollar still difficult to dislodge, but with the argument over what the Federal Reserve does next rather less settled than it looked a few days ago. British manufacturing figures arrive later this morning, before Friday brings eurozone inflation and the US jobs report – two releases capable of shifting that argument all over again.
GBP: Growth offers some cover
The GDP upgrade was not the only encouraging detail for the pound. Household incomes improved and the saving ratio rose during the second quarter, suggesting consumers had a little more room to absorb higher costs than previously thought. Today’s final manufacturing survey will show whether businesses carried that resilience into September.
GBP/USD: the past year
EUR: Energy keeps biting
The euro remains under pressure after a difficult September against the dollar, with higher energy costs creating the awkward combination of stronger inflation and weaker growth concerns. Today’s final factory surveys will add another piece to the picture before Friday’s eurozone inflation figures provide the bigger test for the European Central Bank.
GBP/EUR: the past year
USD: Jobs keep pressure alive
Softer inflation has reduced expectations of an immediate Federal Reserve rate rise, but the rebound in private-sector hiring stopped the argument there. Another strong employment number on Friday would give policymakers fresh evidence that the US economy continues to cope with high borrowing costs, while weaker figures would strengthen the case for waiting.
USD/GBP: the past year
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