Image © Adobe Images

The Pound to Dollar exchange rate (GBPUSD) is nursing a slight loss for the week but a key U.S. labour market release will determine with Pound Sterling records a fifth consecutive negative weekly close.

The dollar's appreciation has softened this week as long-dated bond yields pull back from recent highs and oil prices drop sharply and ease concerns of another commodity-lead inflationary impulse.

"However, with the interest rate outlook still uncertain, today’s important U.S. labour market data could have a significant impact if they stray significantly from expectations," says Rhys Herbert, an economist at Lloyds Bank.

The Pound to Dollar exchange rate is quoted at 1.2176, having recovered from a low of 1.2038 recorded earlier in the week.

The labour market report is released at 13:30 BST with the consensus looking for a reading of 170K, down on August's 187K. An average hourly earnings increase of 0.3% is expected while the unemployment rate is expected to be at 3.7%.

"The release of the U.S. labour market report will be the key event of the day for markets. It is always seen as an important indicator of economic conditions, but given current bond market nervousness, today’s report is likely to be watched particularly closely," says Herbert.

Any deviation in wages to the upside or topside could also impact the market's interpretation of the report, given a stronger wage reading would be considered supportive of the need for another Federal Reserve rate hike.

The 'higher for longer' theme is one that underpins the rise in U.S. bond yields, therefore, any signs of ongoing resilience in the labour market can extend what is a USD-supportive theme.

"Markets will be looking for clues on two questions. First, is the Fed likely to raise interest rates again this year and second are concerns that rates are likely to stay higher for longer than previously expected legitimate?" notes Herbert.

Lloyds Bank's economists note there is only a limited amount of data left for release before the Fed’s next policy update on November 01 ensuring today's report is pivotal in determining whether rates will be hiked again at that point.

"However, it probably will do little to change the uncertainties regarding the longer outlook for rates," suggests Herbert.

Lloyds Bank is expecting that today’s report will show that the labour market still looks strong and forecasts a rise in payrolls of 190k, which would be Dollar-supportive.

Economists at the bank are also expecting a fallback in the unemployment rate to 3.6% from last month’s unexpected rise to 3.8%, and a modest acceleration in wage growth.

"That would provide the Fed with some justification for another rate hike but would not be strong enough to make the decision clear cut, particularly given the recent rise in bond yields, which the Fed may regard as akin to another tightening move," says Herbert.