Pound firm ahead of US jobs data, unruffled by geopolitics

Sterling remained stable on Friday, ahead of key U.S. employment figures that could influence the trajectory of the U.S. dollar in the coming weeks. The pound was last at US$1.3525, only marginally different from the US$1.3525 it reached on Thursday, after climbing by 0.3% the previous day. Market volatility was kept in check in the lead-up to the August U.S. nonfarm payrolls report, which could either lift the dollar if employment figures exceed expectations or cause further declines if job growth falls short of hopes.

Bank of England Chief Economist Huw Pill stated on Thursday that raising interest rates now would lessen the likelihood that the central bank would have to adopt a more aggressive stance to curb inflation, which has surged due to the Iran conflict. Traders anticipate the Bank of England to hike interest rates twice within the next six months. Economists anticipate the central bank to keep rates steady later this month, observing corporate pricing power and wage growth, amid elevated energy costs stemming from the Iran war.

The Bank of England strategists express hesitation about the central bank being overly hawkish due to current supply shocks, interest rates at 3.75%, and weak UK labor market conditions, coupled with a complicated fiscal scenario. This skepticism leads them to adopt a mildly bearish stance on the pound in the near term. However, they believe the recent surge in energy prices could eventually spur a policy recalibration, bolstering sterling's support and reinforcing its carry appeal.

Yet, they note that this bullish push is unlikely to be significant as more than two rate hikes are already factored in.

In a survey published by the Bank of England on Friday, British businesses anticipate a slight deceleration in price increases over the next year. On the geopolitical stage, Argentine President Javier Milei threatened oil companies engaged in drilling in the Falkland Islands, a British Overseas Territory claimed by Argentina, in a televised address on Thursday.

His move could exacerbate tensions with London. Days earlier, President Donald Trump indicated he was reviewing the U.S.' neutral stance on the remote archipelago in the South Atlantic.

British Defense Minister Wes Streeting confirmed on Friday in a post on X that the UK's commitment to the Falklands is "absolute and unshakeable." Despite these geopolitical developments, British markets remained relatively untroubled. The 10-year gilts, which have been affected by a broader downturn hitting global government debt over the past few weeks, yielded 5.1431%, indicating no change for the day.