GBP/USD: Dollar rebounds after soft payrolls report

The British pound is lower against the US dollar on Monday after another Bank of England policymaker suggested they were prepared to vote to cut UK interest rates this year. At the same time the US dollar was recovering losses made at the end of last week following US unemployment data that missed expectations.

GBP/USD was lower by 87 pips (-0.65% to 1.2973 as of 1pm GMT, taking the currency pair back below the widely-watched 1.30 level.

Wider markets were looking buoyant on hopes that the US and China will finally sign off on phase one of a trade deal, paving the way for higher corporate earnings and stronger economic growth this year.

The pound

The dovish comments from the Bank of England’s Gertjan Vlieghe over the weekend come on the back of similar remarks from the Governor of the Bank of England Mark Carney last week. Both policymakers are suggesting that  interest rates may be set to go lower in the UK this year. The British pound had finished 2019 strongly in the wake of the December election and prospects for more economic certainty surrounding Brexit. Central bankers are pouring cold water over hopes of a stronger British economy, suggesting monetary policy may need to be eased if a post-Brexit recovery never materialises. Financial markets are now pricing in 50 basis points (0.5%) of interest rate cuts this year, which would take the official rate to a record low of 0%.

Adding to the weakness in Sterling was the release of UK industrial production for November. A shock monthly contraction of -1.2% against expectations of a much smaller -0.1% decline deepened concern about the state of UK industrial productivity. Manufacturing production was even worse, slumping -1.7% against expectations of a -0.3% drop. The data supports a global picture of manufacturing recession as producers manage through a global growth slowdown. More forward-looking PMI data has offered signs of green shoots but that still isn’t showing up in the hard data.

The dollar

The US dollar was on the rebound as attention turned away from unrest in the Middle East to the signing of a phase one US-China trade deal, scheduled for this Wednesday, January 15^th. Monthly payrolls data had seen the USD turn lower on Friday but by Monday confidence in the currency was returning.

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