Sterling today: Pound fall as UK jobs data disappoints, dollar firm

The British pound experienced a decline on Tuesday as a disappointing UK jobs report added to the strength of the dollar, while the euro also weakened against the US currency ahead of the Federal Reserve's decision on Wednesday. The GBP/USD exchange rate fell to 1.3470, a 0.23% decrease, while the EUR/USD rate traded at 1.1537, down by 0.11%.

The UK's private sector payrolls dropped by 34,000 in August, marking a 0.8% year-on-year decline, with hiring in hospitality and retail falling more than 3% annually. James Smith, an ING UK economist, stated that the UK economy is less vulnerable to another sustained inflation wave, and the Bank of England is expected to maintain interest rates at 6-3 at Thursday's meeting.

Wage growth has remained near a floor of 2.9%, consistent with the Bank's 2% inflation target, indicating an unlikely hawkish surprise this week, unless there is a further rise in energy prices. Analysts noted that this week's broader weakness in sterling is driven by the dollar, rather than being specific to the UK. The dollar started the week strongly, aligning with supportive short-term factors such as front-end rates, higher energy prices, and soft risk sentiment.

The dollar index reached its strongest session since a speech by Fed Governor Kevin Warsh, and the yen lost its unique support, briefly reaching 155.0. The 10-year U.S. Treasury yield touched 5.0%, which ING's rates team considered tolerable rather than alarming, sitting about 50 basis points above their estimated neutral range of 4%-4.5%.

Traders are focused on Wednesday's FOMC announcement, anticipated to deliver a rate hike, and are watching if Treasury Secretary Scott Bessent will authorize additional bond-buyback intervention after a $6 billion operation failed to impress investors last week. ING believes that larger unscheduled buybacks could be dollar-negative, regardless of their effectiveness in controlling yields.

The bank doubts the recent 0.5% decline in EUR/GBP since Friday will hold, citing risks from the late-October budget and pressure on Downing Street over devolution referendums, with the bank's EUR/GBP target remaining at 0.87. For the euro, ING indicated that EUR/USD is trading near short-term fair value, slightly favoring undervaluation.

Germany's ZEW survey is expected to improve, with the expectations gauge projected to rise from 34 to 40. Pesole suggested that global equities and short-term rates carry the highest betas on the pair currently, and a hawkish surprise or Gulf-related oil spike from the Fed tomorrow could propel the pair to their 1.150 short-term target.

ING's base case assumes further dollar strength leading up to the FOMC decision, with a hawkish surprise or oil price surge as the main catalysts that could push EUR/USD towards 1.150 and sterling to new lows.