Sterling Rises as Weak US Jobs Data Weighs on Dollar, Fed Outlook

The British pound strengthened against the U.S. dollar on Monday, with the euro also posting gains, as investors reassessed the Federal Reserve's policy path following a weak U.S. payrolls report released on Friday.

Market Reaction

The pound sterling (GBP/USD) rose 0.07% to $1.3503, while the euro (EUR/USD) climbed 0.05% to $1.1565 in early trading, according to Investing.com data. The moves reflect broad-based dollar weakness rather than UK- or Europe-specific developments, with no major economic releases scheduled in the UK on Monday.

Analysts noted that the currency moves were a direct consequence of the U.S. labor market data. "The first test arrived on Friday and came through clearly dovish and dollar-negative," said Francesco Pesole, an FX strategist at ING, in a note.

The Catalyst: US Payrolls

Last week's employment report showed a surprising decline of 20,000 jobs, compounded by more than 100,000 in downward revisions to previous months. This left the three-month average for job growth at just 20,000, significantly weakening the case for further interest rate hikes by the Federal Reserve.

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Despite the soft data, markets are still pricing in some probability of future rate hikes. However, Pesole noted that "there remains ample room for dovish repricing to harm the dollar if we are right about the Fed." ING's base case is for no further Fed hikes this year.

Looking Ahead to Inflation Data

Investors are now turning their attention to the next major U.S. data point: the Consumer Price Index (CPI) report, due on Wednesday. This will be a critical test for the dollar and will heavily influence the Federal Reserve's upcoming September policy meeting.

ING forecasts a 0.1% month-on-month increase in headline inflation, below the consensus of 0.2%, which could add further downward pressure on the dollar. A hotter-than-expected core CPI reading, however, would be the key risk that could stall the dollar's decline and cap gains for sterling and the euro.