British Pound climbs above 1.3500 after weak US NFP data

The British Pound (GBP) experienced a significant rise against the US Dollar (USD) on Friday, reaching around 1.3506, just below three-week peaks. This surge occurred following a weak Nonfarm Payrolls (NFP) report from the US, which indicated that the economy lost 23,000 jobs in July, far below the expected 80,000 gains. Additionally, June's employment gain was revised downward to 20,000 from an initial report of 57,000.

The unexpected drop in the Unemployment Rate to 4.1% from 4.2% further contributed to the decline in the USD.

The weaker-than-expected labor market data put pressure on the US Dollar and US Treasury yields. The US Dollar Index (DXY), which measures the strength of the USD against six major currencies, declined nearly 0.45% on the day, trading around 99.50. Meanwhile, the 10-year US Treasury yield fell to approximately 4.60%, eight basis points below its intraday high of 4.68%.

Markets now have a 42.1% probability of a Federal Reserve (Fed) interest rate hike at the September meeting, down from 67% a week ago, according to the CME FedWatch Tool. This softened labor-market data follows a recent decline in energy-driven inflation risks, as oil prices dropped around 10% this week. West Texas Intermediate (WTI) oil traded at $76 per barrel, down significantly from previous levels.

Investors are now focusing on next week's US Consumer Price Index (CPI) data for more insights into the inflation outlook. Market participants anticipate a 0.1% month-over-month (MoM) increase in CPI for July, following a 0.4% decline in June, while core CPI is expected to rise by 0.2% after staying unchanged in the previous month. The Nonfarm Payrolls (NFP) report, a key component of the US Bureau of Labor Statistics' monthly jobs report, measures the change in employment in the US, excluding the farming sector.

NFP figures can significantly influence the Federal Reserve's decisions on interest rates, as they provide a measure of the effectiveness of the Fed's mandate to maintain full employment and 2% inflation. Higher NFP figures typically suggest a tighter monetary policy stance, supporting the USD, while lower NFP readings may weaken the USD.

In addition, higher NFP can negatively impact gold prices, as stronger USD reduces the attractiveness of gold as an investment compared to cash, which earns interest. The participation rate and average weekly hours components also play a role in market reactions, although they are less significant in most cases.