Sterling moved higher on Friday as the U.S. dollar weakened following a disappointing American employment report.
The euro also gained ground as the weaker jobs figures strengthened expectations that the Federal Reserve may have finished raising interest rates.
Pound and Euro Rise Against the Dollar
GBP/USD climbed to around $1.3360, gaining 0.10% during the session and remaining on course for a weekly advance.
EUR/USD rose 0.18% to approximately $1.1455 by 07:30 ET, or 11:30 GMT.
The gains mainly reflected widespread weakness in the U.S. dollar rather than stronger economic conditions in the United Kingdom or eurozone.
U.S. Jobs Report Disappoints Markets
Francesco Pesole, foreign exchange strategist at ING, said there were few positive elements in the latest U.S. employment report.
The economy added 57,000 jobs during the month. However, payroll growth for the previous two months was revised down by a combined 74,000.
The unemployment rate declined to 4.2%, but Pesole noted that the fall was largely caused by a lower labour force participation rate.
This may indicate that more workers are leaving the labour market rather than finding employment.
Federal Reserve Outlook Remains Uncertain
The jobs report made it more difficult for markets to rebuild expectations of further Federal Reserve tightening.
However, ING said the figures were not weak enough to trigger a major shift towards looser monetary policy.
More than 25 basis points of interest rate cuts remained priced into the December futures contract.
ING expects the U.S. Dollar Index to stabilise between 100 and 101.5 over the coming weeks rather than enter a prolonged decline.
Traders Await More U.S. Economic Data
Investors will now focus on comments from Federal Reserve official Mary Daly later on Friday.
Markets will also monitor weekly jobless claims, factory orders and durable goods data.
The next major test will be the U.S. inflation report due on July 14. The figures could influence expectations for future Federal Reserve interest rate decisions.
Sterling Gains Despite Weak UK Outlook
The pound’s advance was not supported by stronger UK economic fundamentals.
Bank of England Governor Andrew Bailey said the British economy was experiencing a soft patch during comments at the European Central Bank’s forum in Sintra.
Bailey added that higher mortgage rates had already tightened financial conditions, reducing the immediate need for another interest rate increase.
However, he also indicated that interest rate cuts were not currently under consideration.
Easing Middle East Tensions Support Sterling
Improving sentiment surrounding the Middle East provided modest support for risk-sensitive currencies, including the pound.
Qatar signalled that another round of indirect negotiations between the United States and Iran could take place.
The prospect of further diplomatic progress reduced demand for the U.S. dollar as a safe-haven currency.
Euro Gains Remain Limited
The euro also benefited from dollar weakness, although expectations of additional European Central Bank rate increases continued to fade.
Pesole said the movement in EUR/USD showed that investors still lacked a convincing reason to become strongly bullish on the euro.
Markets were pricing in only around 11 basis points of ECB tightening by September and 17 basis points by the end of the year.
These expectations followed softer-than-forecast eurozone inflation data and persistently low oil prices.
ING Sees Resistance Above $1.15
ING expects the euro’s upward momentum to weaken once EUR/USD moves beyond the $1.1500 to $1.1530 area.
The bank forecasts a sustained return above $1.16 only later in the summer.
ING continues to expect a weaker dollar during the second half of the year. However, a lasting decline may require confirmation from the July 14 inflation report or a clearer shift in Federal Reserve policy expectations.
