The broad dollar index rose on Tuesday as a jump in Britain’s jobless data suggested fewer Bank of England rate hikes may be needed to lower inflation.

After Britain’s unemployment rate unexpectedly jumped to 3.9% in the three months to March as more individuals sought jobs, the sterling fell as much as 0.5% against the dollar to $1.2467 and declined to 87.17 pence the euro.
Current market pricing predicts at least one more 25 basis point rate increase from the Bank of England, with a fair possibility of a subsequent hike, but analysts warned this data could force the BOE to be more cautious.

According to Rabobank’s director of FX strategy Jane Foley, broader issues are also weighing on the pound: “Most of the sterling’s good news is in the price.” Can we go long? It’s not. The markets were pricing in a stronger economic outlook but not good.”

The dollar index, USD=>, which gauges the unit versus six major peers, gained 102.57, just shy of Monday’s five-week high of 102.75, while the pound fell.

Foley said, “Market expectations were for a fed rate cut this year, but the data just isn’t playing ball, and adding to that, there is a bit of haven demand,” citing the debt ceiling standoff, slowing U.S. and eurozone growth, and Tuesday’s weak Chinese economic data.

“With all that, do you really want to buy a lot of risky assets this year?” said Foley.

President Joe Biden was optimistic that a compromise could be reached before Tuesday’s congressional leaders meeting. However, the two sides remained far apart, according to Republican House of Representatives Speaker Kevin McCarthy.

The dismal Chinese data also weighed on the Australian dollar, which fell 0.5% to $0.6665.

“Investor concerns over China’s outlook have capped the Aussie’s upside for some time,” said Westpac senior FX analyst Sean Callow.

“Today’s data will set the Aussie back on its heels,” he said, forecasting that the currency might fall to 0.6645, the bottom limit of its previous trading range.

In early European trading, the euro rose to $1.0892, and the yen, battered by a larger difference between U.S. and Japanese long-term yields, recovered from a nearly two-week low. At 135.87 yen, the dollar fell 0.16%. China’s offshore yuan rose to 6.9795, its strongest since March 10.