USD and GBP: All you need to know

Dollar skips to the Fed beat

The dollar came off its highs overnight after a couple of Fed speakers suggested the bank could skip a hike at its June meeting. This strategy could buy the Fed a little more time. However, US data and the overnight release of the Fed Beige Book suggest the dollar will hold gains as we head into today jobs report!

USD: We're hearing more of this term 'skip'

The dollar had a solid rally due to unexpectedly strong JOLTS job opening data. However, it experienced a late sell-off following remarks from Federal Reserve speakers Patrick Harker and Philip Jefferson. They suggested that the Fed might consider forgoing a rate hike at the June meeting but remain open to the possibility of a hike in July. This idea of "skipping" a rate hike was introduced by Christopher Waller last week, indicating that the Fed is adopting a new communication tool to gracefully conclude its tightening cycle.

While this new strategy provides flexibility for the Fed, the final decision will heavily depend on the data. The recent release of the Fed's Beige Book appeared reasonably positive, showing no clear signs of economic slowdown. Consumption remained strong, although there were some early indications of easing pressures in the tight labour market. However, these signs do not support a narrative of an impending recession, suggesting that the current dip in the dollar may not be significant.

In anticipation of today’s May nonfarm payroll report, today's focus is on the released of ISM Manufacturing. However, it is unlikely to make substantial moves until tonight more influential jobs and wage data. The expected trading range for the DXY is between 104.00 and 104.50. If the Fed indeed maintains a stable policy rate throughout the summer, it could generate increased interest in the carry trade, potentially causing USD/JPY to climb back to the 141 area.

GBP: Still going strong

Sterling continues to exhibit strong performance in the market. While there has been a slight reduction in the aggressive tightening expectations for this year, it remains relatively unchanged. There were speculations that Catherine Mann, a hawkish member of the Bank of England, would use a recent speech to push back against these expectations, as the BoE did in the past when the market anticipated a Bank Rate of 5.50%.

However, staying true to her stance, Mann cautioned that UK consumers were using their pandemic-induced savings excessively for spending, and corporations were capitalizing on improved pricing power to enhance their margins.

As a result, the market still expects nearly 100 basis points of tightening this year, leading to the decline of EUR/GBP below the 0.8600 level. Sterling has now emerged as an attractive currency for the carry trade within Europe. Unless Eurozone CPI data surprises positively and drives up Eurozone swap rates, it is likely that EUR/GBP will gradually decline towards the 0.8550 region.