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The British pound's rally against the dollar is building a head of steam.
The pound to dollar conversion (GBP/USD) trades at 1.3333 at the time of writing Thursday after the U.S. November ADP employment report read -32k, disappointing consensus expectations for a 10k gain in employment.
The disappointment provides further evidence of a cooling U.S. labour market and is expected to catch the eye of the Federal Reserve.
"This weak report, coming just before the Federal Reserve’s final policy meeting, intensifies concerns about a more rapid deterioration in the labour market, sending the U.S. Dollar lower against all G10 currencies and causing the odds of a rate cut next week to climb to 93%," says Antonio Ruggiero, an analyst at Convera.
ADP's is just the latest set of soft labour market data and will likely convince the Federal Reserve that there's enough of a clear trend to pull the trigger on an interest rate cut at next week's policy meeting.
The Fed's dual mandate of controlling inflation and protecting the labour market means it cannot ignore the softening dynamics:
Since the month of June (-23k), ADP has only reported job gains in the months of July and October, with Wednesday's print being the 2nd-worst since June 2020.
But the details of the report are perhaps the most alarming takeaway as companies with fewer than 50 employees shed 120k jobs, the largest one-month decline since May 2020.
"Weakness was concentrated among small businesses, where the number of jobs fell by no less than 120,000 during the month, the most since the pandemic," says Jocelyn Paquet, an economist at NBC Capital Markets.
"This decline is not a fluke, but rather part of a trend in which small business employment has dropped by 264,000 since the most recent peak in April," she adds.
Image courtesy of Pantheon Macroeconomics.
Businesses with fewer than 500 employees account for more than four out of five jobs in the U.S.
Wage growth cooled, with workers who changed jobs seeing a 6.3% increase in pay, the lowest since February 2021. This will weigh on future inflation, making the Fed's decision to cut all the easier.
"It's becoming clear that downside employment risks are gradually taking the upper hand, starting to build the case for more Fed rate cuts in Q1 2026 as well," says a note from KBC Markets.
GBP/USD rose 1.0% on Wednesday and takes the month's advance to 0.83%, ensuring sterling is well poised to record a second consecutive monthly gain.