Sterling today: Pound edges higher as dollar holds gains before U.S. payrolls

On Friday, the British pound saw a slight rise, while the euro showed a minor increase as well. However, the dollar maintained its strength, trading near its highest levels of the year, prior to the release of U.S. September employment figures. The GBP/USD pair climbed 0.08% to $1.3211, while the EUR/USD pair gained 0.04% to $1.1248 at 14:44.

The dollar index reached a new annual high above 101.80 on Thursday. Chris Turner, global head of markets at ING, noted that the dollar may continue to hold or even extend its gains, especially against the euro, due to high energy prices and resilient U.S. economic data. ING anticipates the index to reach the 102.85 area. The probability of a Federal Reserve rate hike in October fell to 28% from 70% a week earlier, as John Williams and Philip Jefferson expressed concerns about rushing into consecutive rate hikes.

Short-term U.S. interest rates experienced their largest decline since late August, with markets now predicting a December hike. September's non-farm payrolls are expected to show a gain of 85,000-90,000, with unemployment at 4.1% and earnings up 3.1% year-on-year. ING believes that the prior reading of 162,000 is unlikely to be met.

Given the low growth in the U.S. labor force, Turner believes that a negative surprise in the headline number will not significantly impact U.S. rates or the dollar. September's U.S. inflation data is scheduled for release on October 14. The rise in sterling is not attributed to UK fundamentals but rather a global bond sell-off that pushed up UK long-dated yields to multi-decade highs.

The euro, being the weaker side of the trade, broke to new lows for the year on Thursday as French debt sales intensified. Turner suggested that the sell-off raised doubts about the European Central Bank's ability to implement further rate hikes. ING believes that investors now assume any ECB action would result in less or no tightening or, in extreme cases, use of the Transmission Protection Instrument.

If the euro continues to decline, ING strategist Francesco Pesole predicts it could add another 2% risk premium. After breaking technical support, ING sees EUR/USD potentially reaching 1.1100/1120, or even closer to 1.10, in the near term. Turner expects any upward corrections to be relatively shallow, and ING's outlook may change if French and peripheral bond markets stabilize and the ECB proceeds with tightening.

A breakthrough in U.S.-Iran negotiations, which Turner deemed the main risk to a dollar rally in October, could also affect the currency's direction.