Finance

Pound Sterling declines to three-month low after UK unemployment rate jumps to 4.3%

3 days ago
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  • The Pound Sterling slumps to nearly 1.2800 against the US Dollar after the release of the weak UK employment data.
  • UK Unemployment Rate jumped to 4.3%, while Average Earnings grew faster than expected in the three months ending September.
  • Investors await the US inflation data for fresh interest-rate guidance.

The Pound Sterling (GBP) weakens against its major peers on Tuesday after the release of employment data from the United Kingdom (UK) showed loosening labor market conditions. The Office for National Statistics (ONS) reported that the ILO Unemployment Rate rose to 4.3% in the three months to September from 4.0% in the three months ending August, higher than estimates of 4.1%. In the same period, UK employers added 219K new workers, fewer than the former release of 373K.

Signs of slowing labor demand have weighed on the British currency even as not all components of the release were GBP-negative. Average Earnings data, a measure of wage growth, grew at a faster-than-expected pace in the three months ending September. Earnings excluding bonuses rose by 4.8%, higher than estimates of 4.7% but slower than the former release of 4.9%. Average Earnings Including bonuses accelerated to 4.3% against expectations and the prior reading of 3.9%.

Bank of England (BoE) officials have been closely tracking wage growth when deciding on interest rates as it is a major driving force to inflationary pressures in the service sector. The policy-easing cycle by the BoE has been more gradual compared with other G-7 nations, and higher service inflation is the key reason behind this approach.

It will be interesting to see whether traders increase BoE rate cut bets due to the slowing job market or pare them amid faster-than-projected wage growth. Currently, traders are slightly bent towards another interest rate reduction by 25 basis points (bps) in the December monetary policy meeting. The BoE also reduced its key borrowing rates by 25 bps last week, but favored a more gradual policy-easing approach.

Daily digest market movers: Pound Sterling weakens against US Dollar

  • The Pound Sterling slides to near 1.2800 against the US Dollar (USD) in Tuesday’s London session, the lowest level seen in almost three months. The GBP/USD pair weakens due to a slower UK job market and the strength in the US Dollar across the board.
  • The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, refreshes a four-month high above 105.70. The Greenback extends its upside trend generated by Donald Trump’s victory in the United States (US) presidential election as it looks increasingly likely that Republicans will control both the Senate and the House of Representatives when Trump takes office in January, according to projections from Decision Desk HQ.
  • Trump’s protectionist trade practices and his promise to lower corporate taxes are expected to boost inflationary pressures, which would force the Federal Reserve (Fed) to follow a more gradual policy-easing approach. In the December policy meeting, the Fed is expected to cut interest rates again by 25 basis points (bps) to 4.25%-4.50%, according to the CME FedWatch tool. Still, investors have recently pared back bets of such an outcome.
  • Meanwhile, investors await the US Consumer Price Index (CPI) data for October, which will be released on Wednesday, and commentary from a slew of Fed policymakers for fresh interest rate guidance. Economists expect the headline inflation to have grown by 2.6%, faster than 2.4% in September on year-on-year. In the same period, the core CPI – which excludes volatile food and energy prices – is expected to have risen steadily by 3.3%.
  • The impact of inflation is expected to be weak on the Fed monetary policy action in December unless there is a significant deviation from the consensus, as policymakers seem to be confident about inflation remaining on track to the bank’s target of 2%.

Technical Analysis: Pound Sterling falls to near 1.2800

The Pound Sterling posts a fresh almost three-month low near 1.2800 against the US Dollar. The GBP/USD extends its downside after failing to hold the 200-day Exponential Moving Average (EMA), which trades around 1.2860. The overall trend of the Cable turned negative after a breakdown from the lower boundary of the rising channel, which set a bearish reversal.

A bearish momentum has kicked in with the 14-day Relative Strength Index (RSI) falling below 40.00.

Looking down, the August low at 1.2665 will be a major cushion for Pound Sterling bulls. On the upside, the Cable will face resistance near the psychological figure of 1.3000.

Pound Sterling FAQs

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

 

Source: https://www.fxstreet.com/news/pound-sterling-declines-to-three-month-low-after-uk-unemployment-rate-jumps-to-43-202411120802