GBP/USD drops on robust US NFP, US inflation eyed

The GBP/USD pair prepares to finish the week with hefty losses of 0.78%. US labour data poured cold water on recession fears ahead of next week’s CPI.

The GBP/USD tanks reached a fresh weekly low at 1.2002 as a reaction to a stellar US employment report which eases US recession fears while increasing the odds for further Federal Reserve aggressive tightening amidst a 9% inflation in the country.

During the day, the GBP/USD peaked at around 1.2169, but as abovementioned, it tumbled. Still, the GBP/USD is trading at 1.2078, down 0.67%, though some 70 pips above the day’s low.

Market sentiment remains mixed, with most EU stocks closing with losses while US equities wobble. On Friday, the Department of Labour revealed that July Nonfarm Payrolls added 528K jobs to the US economy, smashing estimations of 250K. Additional data from the US jobs report illustrates that the labour market remains tight, with the Unemployment rate falling to 3.5% and Average Hourly Earnings increasing 0.5% MoM while, on an annual basis, rose by 5.2%

On Thursday, Cleveland’s Fed President Loretta Mester kept her hawkish stance. She said the rate path outlined by June dot plots is about right, while adding that a 75 bps for September is not unreasonable.

The Bank of England Chief Economist Huw Pill said that the BoE would return to its 2% inflation target but added that “it’s going to be a process, which is going to take time reflecting the magnitude of shocks we’ve seen,” on Friday. Those remarks came one day after the BoE raised rates by 50 bps, the most in 27 years, lifting the Bank’s Rate to 1.75%, and warned that the UK might tap into a recession by the year’s end.

All that said, the GBP/USD prepares to finish the week with losses. The resilience shown by the US economy so far, with ISM PMIs holding the fort in expansionary territory and a solid labour market, paints a positive picture for the greenback. Contrarily, the stagflationary scenario looming in the UK, we can conclude that the Sterling’s weakness could remain towards the next week.

Next week, the UK economic docket will feature RICS House Price Balance as the only market mover data. The US docket will feature the Inflation data, namely consumer and producer indices, Initial Jobless Claims, and the University of Michigan’s Consumer Sentiment for August.