Pound Sterling Gains as Weak U.S. Jobs Report Weighs on Dollar

The British pound strengthened on Friday, capitalizing on a broad-based slump in the U.S. dollar after a disappointing U.S. jobs report fueled investor speculation that the Federal Reserve has concluded its interest rate-hiking campaign.

By 07:30 ET, the pound was trading 0.10% higher at $1.3360 against the dollar, putting it on track for a weekly gain. The euro also advanced, with the EUR/USD pair climbing 0.18% to $1.1455.

U.S. Labor Market Shows Signs of Cooling

The dollar's decline was triggered by a U.S. jobs report on Thursday that showed payrolls grew by a modest 57,000. According to Francesco Pesole, an FX strategist at ING, this figure was "more than offset" by 74,000 in downward revisions to the reports from the prior two months.

While the unemployment rate fell to 4.2%, Pesole noted in a report that this was "driven mainly by a lower participation rate, an unencouraging sign of worker disengagement." He added that there were "not many silver linings" in the report.

Market Reaction and Fed Outlook

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Following the data, markets reinforced bets that the Fed is done tightening monetary policy. Futures contracts indicate that more than 25 basis points of easing is priced in by December. However, Pesole suggested the report was not weak enough on its own to trigger a significant dovish repricing from the central bank.

ING expects the U.S. dollar index to stabilize in a 100-101.5 range in the near term rather than begin a sustained downtrend. Investors are now looking ahead to the U.S. Consumer Price Index (CPI) report on July 14, which is seen as the next major catalyst for Fed policy expectations.

Sterling Strength Not UK-Driven

The pound's advance was primarily a result of dollar weakness rather than positive domestic fundamentals. Earlier in the week, Bank of England Governor Andrew Bailey described the UK economy as being in a "soft patch," stating that higher mortgage rates had already tightened financial conditions, though rate cuts remain "off the table for now."

The euro's gains were also capped by a weakening case for further European Central Bank rate hikes. According to ING, markets are pricing in minimal tightening from the ECB, which limits the currency's upside potential against the dollar.