Pound Sterling rises above 1.3150 ahead of US data-packed day
- The Pound Sterling gains against the US Dollar as lower US job vacancies in July boost chances that the Fed will opt for a large interest-rate cut.
- Weak US job vacancy data raise red flags about labor market conditions.
- Investors see the BoE leaving interest rates unchanged at 5% at this month’s meeting.
The Pound Sterling (GBP) rises above 1.3150 against the US Dollar (USD) in Thursday’s London session. The GBP/USD pair aims to extend Wednesday’s recovery after weak United States (US) JOLTS Job Openings data for July sent the US Dollar (USD) on the back foot. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls to near the crucial support of 101.00.
The Job Openings data, released on Wednesday, showed that fresh job vacancies posted by US employers stood at 7.67 million, the lowest in more than three-and-a-half years. Signs of a slowing job market supported expectations that the Federal Reserve (Fed) could start the policy-easing process aggressively.
According to the CME FedWatch tool, the possibility for the Fed to begin reducing interest rates by 50 basis points (bps) to 4.75%-5.00% in the September meeting has increased to 41% from the 34% recorded a week ago.
Going forward, the US Nonfarm Payrolls (NFP) data for August, which will be published on Friday, will be the major trigger for the US Dollar. The importance of the US labor market data has increased significantly as the Fed appears to be more concerned about preventing job losses as there is increasing evidence that inflationary pressures remain on track to sustainably return to the bank’s target of 2%.
In Thursday’s North American session, investors will focus on the ADP Employment Change and the ISM Services Purchasing Managers’ Index (PMI) for August. The Initial Jobless Claims data for the week ending August 30 will also be important.
Daily digest market movers: Pound Sterling outperforms major peers
- The Pound Sterling performs strongly against its major peers on Thursday. The British currency strengthens as the upbeat United Kingdom (UK) economic outlook has boosted market expectations that the Bank of England’s (BoE) policy-easing cycle could be shallower this year compared to that of other central banks.
- The final estimate for S&P Global/CIPS PMI data released on Wednesday showed that overall economic activity in the UK expanded at a faster pace in August. The survey data showed that activity rose at the fastest pace since April, driven by a sharp expansion in manufacturing as well as the services sector.
- Financial market participants expect that the BoE will cut interest rates only once in the remainder of the year. The BoE pivoted to policy normalization in August. The central bank is expected to leave interest rates unchanged at 5% this month, and markets expect another cut in November or December.
- The Pound Sterling will be influenced by market sentiment and speculation for BoE interest rate cuts amid an absence of UK top-tier economic data. Next week, investors will focus on the Employment data for the quarter ending July and the monthly Gross Domestic Product (GDP) data for July.
Technical Analysis: Pound Sterling recovers from weekly low of 1.3090
The Pound Sterling bounces back to near 1.3150 from a fresh weekly low of around 1.3090 against the US Dollar. The GBP/USD pair strengthens after discovering strong buying interest near the breakout region of an upward-sloping trendline plotted from 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) rebounds from 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 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.
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