Dollar Slows as US Jobs Data Looms
- Feb 7
- 3 min read
Updated: Feb 10
GBP : Bank of England slash rates
Yesterday was a big day, the Bank of England slashed the Bank Rate by 25 basis points, downgraded its growth forecasts, and two members of the Monetary Policy Committee voted for a more aggressive 50 basis point drop, the GBP/EUR plunged by as much as 0.5%. MPC member Catherine Mann's decision to back a 50bp decrease in particular caught the market's attention. She was once a staunch hawk who frequently opposed rate reduction and even supported hikes of 50 basis points when others preferred more modest increases of 25 basis points. Markets now put in three more rate cuts this year as a result of this change, which caused a slight repricing of interest rate expectations.The FX market's response, however, was more noticeable. GBP depreciated overall, dropping more than 1% versus the USD at one time, while the GBP/EUR fell to a low of €1.1940.
Mann's decision was heavily influenced by the dramatic drop in growth projections, which also dominated financial headlines and strengthened the impression of a dovish tilt.
The upward revision of UK inflation estimates for 2025 is a major reason in favor of this viewpoint. In comparison to the 2.8% projection in November, the forecast for Q3 is currently 3.7%. Given the inherent difficulties of projecting inflation trends over long periods of time, concerns persist over the BoE's confidence in its long-term forecasts, even though estimates indicate that inflation will revert to the 2% objective starting in 2026.
EUR : A hawkish R-Star rating
Today, the European Central Bank will make public its staff evaluation of the neutral rate. The r-star stands for "a range that does not provide a guideline or a destination," as President Christine Lagarde emphasised last week. Meanwhile, Olli Rehn said Wednesday that policymakers "should not limit their flexibility based on a theoretical concept." The market is mostly focused on the terminal rate because the next few rate cuts are expected to be widely accepted. Although the timing and extent of possible U.S. tariffs will play a significant role, today's news will mostly influence terminal rate expectations as markets await Donald Trump's decision on EU trade measures. We also expect a response in the EUR.
Traders anticipate today's update will suggest a somewhat high neutral rate, reinforcing a hawkish tone, given Rehn's comments and the fact that r-star estimates are model-driven (incorporating substantially higher inflation assumptions than in the past). Markets continue to hold a positive view on the EUR/USD, anticipating another move higher to revisit Wednesday's peak of $1.0440, despite the downside risks associated with U.S. payroll data.
USD : US Jobs data the focus
The USD has slowed its downward trend ahead of today's U.S. jobs data. Markets may be reevaluating their initial optimism surrounding a possible U.S.-China agreement now that the majority of the effects of last weekend's tariff changes have been taken into account. There is less chance of a deal before Monday, when China's retaliatory tariffs are scheduled to go into force. Additionally, Treasury Secretary Scott Bessent's comments, which reaffirmed the commitment to a strong Dollar policy, helped to boost the USD.
The January U.S. payroll statistics will be the main focus for foreign exchange markets. Our prediction is closer to 160K, but the general opinion is a slowdown from 256K to 175K. Annual benchmark changes will receive special consideration. The Bureau of Labor Statistics may have overestimated employment creation by about one-third, according to earlier provisional revisions based on cross-referencing tax data. This calls into question the model's accuracy, and we expect the monthly payroll numbers to change significantly.
