The British pound fell in the European market on Tuesday against a basket of global currencies, extending its losses for a second consecutive day against the US dollar and moving away from a three-week high, as correction and profit-taking continued, alongside risk aversion ahead of the UK labor market data release.
The US currency continues to trade in positive territory after the extension of the US-China trade truce for 90 days and ahead of key July inflation data from the world’s largest economy.
Price Overview
• The pound fell against the dollar by 0.1% to $1.3424, from an opening level of $1.3434, recording a high of $1.3440.
• On Monday, the pound lost 0.15% against the dollar, marking its first daily loss in the past seven sessions, due to correction and profit-taking after hitting an earlier three-week high of $1.3477.
UK Interest Rates
• Following last week’s hawkish Bank of England meeting, traders reduced their bets on rate cuts, now expecting an additional 17 basis points of easing this year.
• The probability of a 25 basis point BoE rate cut in the September meeting is currently priced below 25%.
UK Labor Market
The upcoming UK labor market report, due later today, is equally important for the pound as it is expected to provide more signs of a slowdown in the jobs market.
There are ongoing indications that Rachel Reeves’ jobs tax is weighing on the labor market, likely leading to more job losses.
Traders are also facing challenges with unreliable UK labor market survey data, as some survey components are now deemed inaccurate.
A weak jobs report would further support the case for the Bank of England that the economic downturn is unfolding, warranting additional interest rate cuts.
With forex markets once again focusing on relative interest rates, an acceleration in BoE rate cuts would weigh on the pound.
US Dollar
The US dollar index rose slightly by less than 0.1% on Tuesday, maintaining its gains for the third consecutive day, reflecting continued strength of the US currency against a basket of major peers.
President Donald Trump extended the suspension of tariffs on Chinese imports for another 90 days until early November, in a move aimed at easing trade tensions between Washington and Beijing, reducing uncertainty and supporting investor risk appetite.
As the US and China work toward a new trade deal, a US official told Reuters that Nvidia and AMD agreed to allocate 15% of Chinese sales revenue to the US government to secure semiconductor export licenses.
According to the CME Group’s FedWatch tool, markets currently price an 85% probability of a 25 basis point rate cut by the Federal Reserve in September, with a 15% chance of no change.
Investors later today await key US July inflation data, which will reveal the extent to which higher tariffs have impacted prices and how much inflationary pressure policymakers at the Fed are facing.
Pound Outlook
We here at Economies.com expect that if UK labor market data is less aggressive than markets anticipate, the likelihood of a September BoE rate cut will rise, leading to further declines in the pound.
