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A major U.S. jobs report will set the mood music for the British Pound ahead of next week's Bank of England decision.
The British Pound has firmed amidst steadily improving global investor sentiment amidst a dearth of domestic news, and Friday's U.S. jobs report is the next big ticket event for international markets.
A strong jobs report would ease concerns that the U.S. is heading for recession, bolster stock markets and further lower volatility. And, as recent days have shown, such conditions would be supportive of the Pound against the Euro, Dollar, Yen and Franc.
The Pound to Euro exchange rate has staged a 2.6% recovery in the second half of April, helped by expectations that U.S. President Donald Trump is open to negotiations and lowering the headline tariffs he announced on April 02.
"The remarkable rebound in US equities since the post-'Liberation Day' turmoil alongside Treasury yields settling lower have signalled that the 'sell America' fears have been largely quelled," says Francesco Pesole, FX Strategist at ING Bank.
Fears for the outlook of global trade and the U.S. economy proved to be particularly beneficial for the Euro in the first half of April, helping it to significantly outperform most of its G10 peers, including the Pound, owing to significant repatriation flows by European investors in U.S. assets.
This tells us that the Euro would likely benefit if fears for the U.S. economy build again, and why the Pound to Euro conversion could be sensitive to the outcome of the U.S. jobs report.
Above: Volatility (fear) is good for the euro. Chart shows the pound recovering against the euro as volatility eases via a weakening in EUR/GBP.
The expectation is that the U.S. created 130K jobs in April, up from the 228K in March, suggesting the economy was relatively unaffected by tariffs and Trump's broader reforms (DOGE in particular).
If the headline figure is met, then foreign exchange markets will likely walk into the weekend relatively unchanged, or even extend recent trends, including a recovery in the Dollar from technically oversold conditions.
This would see GBP/USD edge lower and maybe test 1.33 and GBP/EUR approach 1.18. "The real risks for the dollar may only lie below a 100k print. Anything between that and the 137k consensus may not leave a clear mark on FX," says Pesole.
Expect the moves to be larger in the event of the data easily beating expectations to the upside, i.e. GBP/EUR above 1.18 and GBP/USD into the 1.32s.
The more interesting market reaction would be a downside miss that hints at a real deterioration in the labour market as businesses opted for caution amidst tariff uncertainty.
Here, a Euro rebound would be on the cards, taking GBP/EUR back to 1.17, as the trends of the first half of April are reborn.
A weak job print would also bolster the case for an imminent 'insurance' interest rate cut at the Federal Reserve, which would inevitably weigh on the Dollar, and help GBP/USD recover to 1.34.
The Euro-Dollar would recover to just north of 1.14.
We would caution readers that these are guidelines because there are nuances when considering U.S. data. One only needs to recall the midweek U.S. GDP release that was poor at first glance, but less so when scrutinised, and a market selloff soon gave way to a decent rally.
In particular, seasonal factors and one-offs could impact the market reaction, making for some interesting volatility around the release.
The Pound will then turn its attention to next week's Bank of England decision, which will prove quite pivotal for the UK economy, as we will understand just how concerned policy makers are about recent domestic data and Trump's tariff policies.
The Bank is set to cut interest rates and indicate it stands ready to do so again in June, representing a step-up in the pace of rate cuts, even as inflationary pressures build again.
Given this, there is the prospect of a decline in the value of the Pound following the decision.