- The Pound Sterling refreshes a five-day high near 1.3200 against the US Dollar with US NFP in focus.
- Weak US JOLTS Job openings and ADP Employment Change suggest US labor market conditions are weakening.
- The BoE is expected to cut interest rates only once in the remainder of the year.
The Pound Sterling (GBP) eases slightly after posting a fresh five-day high near the round-level resistance of 1.3200 in Friday’s European session. The GBP/USD pair broadly consolidates against the US Dollar (USD) ahead of the United States (US) Nonfarm Payrolls (NFP) data for August, which will be published at 12:30 GMT.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, declines slightly below the crucial support of 101.00.
Economists estimate that US employers hired 160K new workers in August, higher than the 114K increase seen in July. In the same period, the Unemployment Rate is expected to have declined to 4.2% from the former release of 4.3%. Investors will also focus on the Average Hourly Earnings data, a key measure of wage growth that fuels consumer spending and price pressures. Annually, the wage growth measure is estimated to have increased by 3.7%, accelerating slightly from the prior reading of 3.6%. On the month, Average Hourly Earnings data are forecasted to have grown by 0.3%, faster than the 0.2% advance in July.
The US official employment data will shape the Federal Reserve’s (Fed) monetary policy decision this month. The importance of the job data has increased significantly as the Fed said it is more focused on the labor market health given that inflation is on track to return to the bank’s target of 2%.
The Fed is widely anticipated to start reducing interest rates from the September meeting. However, traders remain split over the likely interest rate cut size. The possibility of the Fed opting for a large interest rate cut has increased this week after the publication of poor US JOLTS Job Openings data for July and ADP Employment Change data for August, which added to evidence of significant cracks in the labor market.
Daily digest market movers: Pound Sterling to be influenced by speculation for BoE interest-rate path
- The Pound Sterling eases slightly after almost touching 1.3200 against the US Dollar and exhibits a subdued performance against its other major peers on Friday. The British currency drops slightly as investors turn cautious amid the absence of United Kingdom (UK) top-tier economic data. Therefore, market sentiment and speculation for the Bank of England (BoE) interest rate path are guiding the value of the currency.
- The near-term outlook of the British currency has remained upbeat recently as investors expect that the BoE’s policy-easing cycle will be shallower than that of other central banks. For example, the European Central Bank (ECB) and the Fed are expected to cut their borrowing rates by 50 basis points (bps) and 100 bps in the remainder of the year, respectively, while the BoE is expected to reduce them by just 25 bps.
- The major reason behind firm speculation for BoE’s more gradual easing cycle is that the economy is doing better than previously expected and the fact that inflation in the services sector remains high.
- In next week’s UK calendar, investors will focus on the Employment data for the quarter ending July and the monthly Gross Domestic Product (GDP) data for July. Both indicators could be key in determining what will the BoE decide to do with interest rates when it meets later this month.
Technical Analysis: Pound Sterling gets close to 1.3200
The Pound Sterling softens slightly after rising to nearly 1.3200 against the US Dollar. The GBP/USD discovered strong buying interest near the breakout region of an upward-sloping trendline plotted from the December 28, 2023, high of 1.2828 on the daily time frame.
Upward-sloping short-to-long-term Exponential Moving Averages (EMAs) suggest a strong bullish trend.
The 14-day Relative Strength Index (RSI) remains nearby 60.00, suggesting a resumption in the bullish momentum.
Looking up, the Cable will face resistance near the psychological level of 1.3500 and at the February 4, 2022, high of 1.3640 if it breaks above a fresh two-and-a-half-year high of 1.3266. On the downside, the psychological level of 1.3000 emerges as key support.
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, aka ‘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-steadies-near-13200-ahead-of-us-nfp-202409060910