The Pound Sterling (GBP) faces selling pressure against its peers on Tuesday after the release of the United Kingdom (UK) labor market data for the three months ending in August.
The Office for National Statistics (ONS) reported that the ILO Unemployment Rate rose to 4.8%, higher than estimates and the prior reading of 4.7%. Fresh workers added during the period came in at 91K, much less than the 232K jobs added in the three months ending July.
Signs of cooling UK labor market are expected to boost expectations for more interest rate cuts by the Bank of England (BoE) in the remainder of the year.
For fresh cues on the monetary policy outlook, investors will focus on speeches from BoE Monetary Policy Committee (MPC) member Alan Taylor and Governor Andrew Bailey, which are scheduled later on Tuesday during the North American session. Investors will closely monitor their words to get cues about whether the UK central bank will cut interest rates again this year.
On Monday, BoE MPC member Megan Greene argued in favour of reducing interest rates further, citing that the monetary policy is still restrictive. However, she remained cautious about inflation returning towards the 2% target.
The ONS data showed that Average Earnings Including Bonuses, a key measure of wage growth, slowed to 4.7% on year, as expected, against the former reading of 4.8%. Average Earnings Excluding Bonuses rose at a faster pace of 5%, higher than expectations and the prior release of 4.7%.
Daily digest market movers: Pound Sterling weakens against US Dollar
- The Pound Sterling slides below 1.3300 against the US Dollar (USD) during Tuesday’s European session after the release of the UK employment data. Apart from weakness in the Pound Sterling, a broadly outperforming US Dollar has also been a major drag on the GBP/USD pair.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near the 10-week high around 99.50.
- The US Dollar exhibits strength amid easing trade tensions between the United States (US) and China. Earlier in the day, China’s Ministry of Commerce stated that high-level trade talks with Washington are ongoing. However, it warned that they would respond if the White House continues with “discriminatory practices” and “abusing export controls”. “If there’s a fight, we’ll fight to the end; if there’s a talk, the door is open,” a spokesperson said, Reuters reported.
- US Treasury Secretary Scott Bessent has also confirmed a meeting between President Donald Trump and Chinese leader Xi Jinping in late October in South Korea.
- On the domestic front, investors await the speech from Federal Reserve (Fed) Chair Jerome Powell at the National Association for Business Economics (NABE) Annual Meeting in Philadelphia at 16:20 GMT. Investors will scrutinize Powell’s words to get clues about the pace at which the Fed will continue loosening its monetary policy in the near term. Fed’s Powell is expected to provide cues about the pace of the monetary-easing cycle for the remainder of the year.
- According to the CME FedWatch tool, traders see a 94% chance that the Fed will reduce interest rates by 50 basis points (bps) to 3.50%-3.75% until the end of the year.
Technical Analysis: Pound Sterling declines below 1.3300
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The Pound Sterling slumps under 1.3300 against the US Dollar (USD) on Tuesday. The outlook for the GBP/USD pair has turned bearish as it has broken down from a Head and Shoulder chart formation on the daily time frame.
A declining 20-day Exponential Moving Average (EMA) around 1.3418 also suggests that the near-term trend is bearish.
The 14-day Relative Strength Index (RSI) trades below 40.00, suggesting a strong bearish momentum.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the psychological level of 1.3500 will act as a key barrier.
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.