- The dollar weakened after a weekly survey showed an increase in the number of US jobless claims, but selling interest had already peaked after the ISM services survey showed an unexpectedly sharp slowdown in activity.
- As a result, the GBP/USD jumped towards the 1.2777 resistance level, its highest in over two weeks, before settling around 1.2740 in early trading on Thursday, amidst a US holiday and anticipation of the UK parliamentary elections.
According to the results of the economic calendar, the US ISM main services purchasing managers index reached a reading of 48.8% in June, which indicates a contraction in activity, down from 53.8% in May. The decline compared to expectations was significant, as the consensus was ready to read 52.5%. In general, services companies constitute by far the largest sector in the US economy. Markets are reacting to the size of the loss and betting that the Federal Reserve will feel confident enough to cut US interest rates in September. In response, US bond yields have fallen, the dollar has fallen, and stocks have risen.
The ISM report showed that US companies expecting higher new orders fell to 47.3%, the lowest level since the Great Recession and lower than the 2001 recession. The price index was 56.3% in June, down 1.8 percentage points from the May reading of 58.1%. Commenting on this, analysts at ING Bank said, "This certainly strengthens the case for a September Fed rate cut as it ticks all the boxes of weak growth, slowing inflation and a deteriorating labor market. The Fed does not want to cause a recession if it can be avoided."
Yesterday, the Labor Department reported that the number of Americans filing new claims for unemployment benefits rose by 4,000 last week to 238,000, seasonally adjusted. The consensus forecast was for a more modest level of 235,000. For his part, Fed Chairman Jerome Powell said on Tuesday that there is a possibility of cutting interest rates if the labor market deteriorates. This was a signal that the Fed would be open to cutting interest rates before inflation moderates to its 2.0% target.
This means that the burden is on the labor market to deliver the rate cuts that many households, businesses and investors in the US are hoping for.
For the dollar, the increased likelihood of a rate cut is leading to weakness. Continued jobless claims stood at 1.858 million in the week ended June 22, the highest level since late 2021. Commenting on this, Jos Verschoor of PNC Bank said, "The labor market is still strong, but hiring is slowing down." And "the message from continued claims is clearer. They have risen above their levels in the second half of 2022 and the whole of 2023. Although the labor market is historically strong, unemployed workers are taking somewhat longer to find jobs."
On Tuesday, Fed Chairman Powell said in Sintra, Portugal, that if the labor market is "unexpectedly weak... we will respond to that as well."
Consequently, markets took this as a signal that labor market developments will take on additional importance for policymakers from now until September. The non-farm payrolls report on Friday will determine whether the dollar will end the week on a stronger footing or whether more selling is in store for it in July.
Technical forecasts for the GBP/USD pair today:
As we mentioned before, the success of GBP/USD in holding above the 1.2775 resistance will support the bulls in further upside. The next stop for further bull control will be 1.2830, which will increase talk of a return to the 1.3000 psychological resistance zone again. Obviously, this will require weaker US jobs numbers and a return of confidence in the pound from the results of the British parliamentary elections. On the other hand, and over the same time frame, the daily chart will remain the most important support level at 1.2600, as bears will control the trend.
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