US rate markets are super sensitive right now to labour data. The reason for this is that a strong labour market is seen as inflationary for the US economy and a weak labour market is seen as a deflationary force. Therefore, if US labour data shows a surprise print in the labour force. This is likely to have a strong market reaction as markets expect higher interest rates to deal with inflation.
The GBP has seen some of its recent strength unwind over the last couple of weeks. The wage data for the UK on Tuesday showed a slight slowdown in the ratio between the unemployed and those in work. The number of unemployed people per vacancy rose to 1.4 for May through to July from 1.2 in February through to April. This did allow the pound to weaken out of this print on Tuesday and also reduced expectations for the Bank of England terminal rate. That rate right now sits at around 5 1/2%, down from over 6% a few weeks ago.
Therefore, if the US labour data out today at 13:30 UK time shows a very strong US labour market, then it would be reasonable to expect a higher US dollar on higher US rate expectations. This, considering the weakness in the pound, should potentially open up a short-term intraday GBPUSD sell bias. However, on the other hand, if there is a big miss in the US initial jobless claims data that would indicate that deflationary forces are finally at work. This would likely see the dollar weakened, and yields fall, and it should lift the EURUSD pair higher. Both of these outlooks would only be short-term and valid in the event of a miss in the data.
Taking a look at data expectations markets are expecting initial jobless claims to increase to 225,000 and continuing jobless claims to increase to 1695,000. Therefore, a surprise increase in these numbers, say to 240,000 for the initial jobless claims and to 1739K for the continuing jobless claims would likely send the GBPUSD lower. This is one outlook to watch at 13:30 UK time over the release.
Major trade risks
The most obvious major trade risk is if the print is within market expectations, as the reaction will be far less certain. Also, there is no guarantee that the market will behave as would be expected. In particular, please note that the US PPI and US retail sales data is released at the same time. For a greater probability of the market reaction playing out as outlined the other data points will also need to be in agreement with the US labour data print. So, if the US labour data misses it will also be necessary for the PPI data to miss and the US retail sales data too.