Pound Gains Against Dollar as Greenback Rebound Faces Labor Data Test

The British pound edged higher against a stabilizing U.S. dollar on Tuesday, with the currency pair's movement largely dictated by a shifting outlook for the greenback ahead of key American labor market data.

As of 04:50 ET (08:50 GMT), the GBP/USD currency pair traded at 1.3440, an increase of 0.07% for the session, according to Investing.com data. The euro was little changed against the dollar, with EUR/USD at 1.1509.

Dollar Finds a Firmer Footing

The dollar's rebound follows a period of weakness and is supported by two key factors, according to Francesco Pesole, a strategist at ING. Firstly, concerns have eased that a large-scale intervention by the Bank of Japan to support the yen, which had weighed on the dollar, has concluded. Secondly, stronger-than-expected U.S. manufacturing data on Monday has tempered expectations for near-term interest rate cuts from the Federal Reserve.

The ISM manufacturing report's surprise upside, particularly in its employment sub-index, has shifted market focus squarely to the U.S. labor market. Pesole noted that speculative positioning for the dollar is now "more balanced" after net-long bets reached their most overbought levels since May 2019 last month. "Further USD losses from here require a more compelling macro argument," he stated.

Sterling Lacks Domestic Drivers

Sterling's relative strength on Tuesday appeared to be a byproduct of the broader dollar narrative rather than any UK-specific catalyst. With no significant domestic economic data or policy announcements, the pound's trajectory is being primarily influenced by external factors and investor sentiment toward the U.S. economy and Fed policy.

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Traders are awaiting fresh signals from the Bank of England regarding its data-dependent policy stance, but Tuesday's session offered no new developments on that front.

Focus Shifts to U.S. Jobs Data

Investors are now looking ahead to a series of crucial U.S. labor market reports that will heavily influence the Federal Reserve's next move. Markets are currently pricing in a 65% probability of a Fed rate hike in September.

Key upcoming releases include:

• JOLTS job openings for June, due Tuesday.
• ADP private payrolls on Wednesday.
• The critical non-farm payrolls report on Friday, with a consensus estimate of 80,000 jobs added.

According to ING, the dollar is unlikely to see significant selling pressure unless these figures materially undershoot expectations, which would reopen the case for a more dovish Fed policy.