GBP/USD rose 0.25% to 1.3570, pushing higher after the initial noisy reaction to confusing U.S. non-farm payrolls data nL1N2TM2F6, but sterling gains face limits as long as markets expect the Fed to be more aggressive than the BoE after this year.
The U.S. jobs report painted an opaque picture at first, with below-forecast payrolls growth contrasting with a rise in earnings and dip in the unemployment rate, though ultimately the stronger elements bolstered hawkish Fed expectations.
Though cable probed the 100-day moving average, rates markets shrugged off the disappointing headline payrolls figure, sending front-end Eurodollar contracts lower on bets that the Fed rate could start hikes as early as the March 16 meeting to fight inflation running near 7%.
Though the BoE has already begun normalizing rates, boosting the pound off December lows by 1.3162, Eurodollar and UK 3-month Sonia futures, begin to diverge after 2022, with U.S. rates rising to 1.84% and UK rates plateauing at 1.43%, by Dec 2023.
U.S. rates continue to climb to 2.02% by December 2025 while UK rates fall back to 1.22.
Unless the Fed tempers markets' hawkish U.S. rates expectations, cable may struggle to gain momentum.
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