Robust US jobs report scuppers Brexit deal rally for the pound

The pound spiked intraday versus the dollar and the euro on Friday (8 December), as the European Union and the British government announced progress of over Brexit talks, only to fall back after a robust US jobs report strengthened the dollar.

At one point in Asian and early European trading, the pound was exchanging at $1.3514 and €1.1507 against the dollar and euro, levels last seen in June, after Prime Minister Theresa May and European Commission President Jean Claude Juncker announced progression to the next stage of Brexit negotiations, involving trade talks between Brussels and London.

In response to the announcement, S&P Global Ratings said its negative outlook on the UK economy would not change despite progress on the talks.

"While sufficient progress has been made during the first phase, many issues are yet to be fully resolved. The situation is further challenged by the UK's slowing domestic economy, the lack of a parliamentary majority, and by the absence of consensus within the government on the shape of the final relationship with the EU. Indeed, these considerations contributed to the slow progress during the first phase of negotiations," the ratings agency opined.

Inevitably, the sterling rally did not last into the European afternoon, more so, after US data pointed to the country's unemployment rate remaining at a 17-year low of 4.1%, accompanied by a robust, above forecast, addition of 228,000 jobs in November.

The figures strengthened the dollar with the US Federal Reserve largely expected to raise rates next week. At 4:33pm GMT, the pound was down 0.77% against the dollar exchanging at $1.3370, and 0.74% lower against the euro exchanging at €1.1369, having shed most of its earlier gains.

Fawad Razaqzada, technical analyst at forex.com, said the GBP/USD cross needs a clean break above $1.35 to encourage bullish sentiment, something that's not quite happening yet.

"From a technical point of view, the pound is consolidating inside converging trend lines. A clean break above the 1.35 resistance level is required if we are to see a run above September's high at $1.3650.

"Our subsequent long-term bullish objectives remain at 1.3835-50 followed by 1.4000-50 area. Short-term support levels come in at 1.3445, 1.3320; the bias would turn bearish if this level were to break."

Looking ahead to what's in store for the dollar, Lukman Otunuga, research analyst at FXTM, said a Fed rate hike next week remains a near done deal, with the market already turning its attention toward what to expect in 2018.

"Although expectations remain elevated over the Fed raising US interest rates by 25 basis points next week, a smog of uncertainty remains over what to expect from the central bank beyond 2017. Much focus is likely to be directed towards average hourly wages, as the noted disappointing wage growth heightens concerns over stubbornly low inflation consequently clouding the prospect of higher rates in 2018."