- The Pound Sterling finds temporary support near 1.3100 against the US Dollar as the Greenback corrects slightly.
- Investors see the Fed reducing interest rates this month but are split over the size of the potential rate cut.
- The BoE’s policy-easing cycle is expected to be shallow for the remainder of the year.
The Pound Sterling (GBP) tries to find a firm footing near the round-level support of 1.3100 in Wednesday’s London session. The GBP/USD pair struggles to gain bids as the market sentiment sours amid increasing uncertainty ahead of the United States (US) Nonfarm Payrolls (NFP) data for August, which will be published on Friday.
S&P 500 futures decline further in European trading hours after a bearish Tuesday, exhibiting a sharp decline in the risk appetite among market participants. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, corrects marginally to near 101.60.
The official labor market data will influence market speculation about the size of the Federal Reserve (Fed) interest rate cut in September. Markets are fully pricing in that the Fed will pivot to policy normalization this month, but traders remain divided about whether the central bank will begin the policy-easing cycle aggressively, with a big interest rate cut, or more gradually.
If the US NFP data points to a further slowdown in labor demand and higher unemployment, market expectations for the Fed reducing its key borrowing rates by 50 basis points (bps) would increase sharply. In a speech at the latest Jackson Hole (JH) Symposium, Fed Chair Jerome Powell vowed to support the labor market in case it continues to deteriorate. On the contrary, steady or better-than-projected job data would weaken expectations of a big rate cut.
In Wednesday’s session, investors will focus on the US JOLTS Job Openings data for July and the Fed’s Beige Book, which will be published at 14:00 GMT and 18:00 GMT, respectively. Economists expect that US employers posted 8.1 million fresh job vacancies, marginally lower from 8.184 million in June.
Daily digest market movers: Pound Sterling remains subdued amid absence of UK top-tier economic data
- The Pound Sterling exhibits a subdued performance against its major peers on Wednesday. The British currency struggles to gain strength despite growing speculation that the policy-easing cycle by the Bank of England (BoE) would be shallow in the remainder of this year compared with that of its peer central banks.
- According to money market pricing data, the BoE is expected to cut interest rates by 40 bps in the remaining year, while the European Central Bank (ECB) is projected to cut by 65 bps, Reuters reported. In the same time frame, the Fed is estimated to cut its key borrowing rates by 100 bps, according to the CME FedWatch tool.
- An improving economic outlook in the United Kingdom (UK) and a slower decline in service inflation have supported expectations of the BoE opting for a gradual policy-easing cycle. The UK economy is expected to perform better than initially anticipated due to an expansion in manufacturing as well as the service sector.
- The final estimate for S&P Global/CIPS Composite PMI came in at 53.8 in August, higher than the preliminary release of 53.4. The indicator suggests that the economy grew at the fastest pace since April.
Technical Analysis: Pound Sterling seeks to gain ground near 1.3100
The Pound Sterling edges higher from a fresh weekly low of around 1.3090 against the US Dollar. Still, the GBP/USD pair struggles to gain a firm footing near the round-level support of 1.3200. The Cable may likely find buying interest near the breakout region of an upward-sloping trendline plotted from 28 December 2023 high of 1.2828 on a daily time frame.
The 14-day Relative Strength Index (RSI) declines to near 60.00 after exiting overbought conditions, signaling a lack of bullish momentum.
However, upward-sloping short-to-long-term Exponential Moving Averages (EMAs) suggest a strong bullish trend.
If bullish momentum resumes, the Cable is expected to rise towards the psychological resistance of 1.3500 and the February 4, 2022, high of 1.3640 after breaking above a fresh two-and-a-half-year high of 1.3266. On the downside, the psychological level of 1.3000 will be the crucial support for the Pound Sterling bulls.
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-remains-on-back-foot-amid-uncertainty-ahead-of-us-nfp-202409040912