- The Pound Sterling trades muted against the US Dollar ahead of key US data on the horizon.
- US NFP and the Manufacturing PMIs could influence the Fed interest rate path.
- The BoE is expected to cut interest rates only once in the remaining two meetings this year.
The Pound Sterling (GBP) ties in a tight range near 1.2900 against the US Dollar (USD) in Friday’s London session. The GBP/USD pair consolidates as investors await the United States (US) Nonfarm Payrolls (NFP) data for October, which will be published at 12:30 GMT. The official labor market data will influence market expectations for the Federal Reserve (Fed) interest rate path for the remainder of the year.
The NFP report is expected to show that the economy added 113K new workers, less than half of 254K jobs created in September. Economists expect the Unemployment Rate to remain steady at 4.1%. Consensus for the NFP data appears to be diverging when compared with Wednesday’s ADP Employment Change data, which showed that 233K new workers were hired by the private sector in October and pointed to an improvement in labor market conditions.
Also, Initial Jobless Claims data for the week ending October 25 fell to 216K against estimates of 230K, the lowest level in almost 22 weeks. Signs of improving labor demand would diminish the risks of an economic downturn and would allow the Fed to follow a more gradual rate-cut path. According to the CME FedWatch tool, the central bank is expected to cut interest rates by 25 basis points (bps) in both policy meetings in November and December.
In Friday’s North American session, investors will also focus on the Average Hourly Earnings and the ISM Manufacturing PMI data for October. Average Hourly Earnings, a key measure of wage growth, is estimated to have grown steadily by 4% on year. Month-on-month, the wage growth measure is expected to have risen by 0.3%, slower than the 0.4% increase seen in September. As for the PMI data, the index is expected to increase to 47.6 from 47.2 in September, signaling that activity in the US manufacturing sector contracted again but at a slower pace.
Daily digest market movers: Pound Sterling could rebound as BoE dovish bets ease
- The Pound Sterling exhibits a mixed performance against its major peers on Friday. The British currency fell significantly on Thursday but appears to have held ground as traders reassess the amount of interest-rate cuts that the Bank of England (BoE) is expected to deliver for the remainder of the year.
- The BoE is expected to cut interest rates once in any of the two meetings in November and December. According to Reuters, traders see an 80% chance that the BoE will cut its key borrowing rates by 25 basis points (bps) on Thursday, pushing them lower to 4.75%.
- On the contrary, analysts at the Bank of Montreal (BMO) expect the BoE to leave interest rates unchanged at 5% in its meeting on Thursday due to various factors. “Considering the composition of the MPC, and the effect the budget measures will have on the BoE projections and on inflation persistence, we think at least 5 [policymakers] may well vote for an unchanged Bank Rate.”
- Market speculation for BoE interest rate cuts has reduced after the United Kingdom (UK) Chancellor of the Exchequer unveiled a 40 billion pounds worth of tax increase, the highest since 1993, and measures to increase fiscal deficit to revive public spending and boost investment. Also, the Office for Business Responsibility (OBR) raised inflation forecasts for 2024 and 2025 to 2.5% and 2.6%, respectively, prompting traders to further pare back BoE rate-cut bets.
Technical Analysis: Pound Sterling breaks down from Rising Channel
The Pound Sterling remains vulnerable near the fresh 11-week low of around 1.2850 against the US Dollar, which was posted on Thursday. The near-term trend of the GBP/USD pair remains uncertain as it stays below the 50-day Exponential Moving Average (EMA), which trades around 1.3060 but has found a cushion near the 200-day EMA around 1.2850.
The GBP/USD pair also delivers a breakdown of the Rising Channel chart formation on the daily time frame, which results in a bearish reversal.
The 14-day Relative Strength Index (RSI) slides back into the 20.00-40.00 range, signaling a fresh bearish momentum.
Looking down, the round-level support of 1.2800 will be a major cushion for Pound Sterling bulls. On the upside, the Cable will face resistance near the 50-day EMA around 1.3060.
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-trades-sideways-ahead-of-us-nfp-manufacturing-pmi-data-202411010806