Pound Sterling recovers from 1.3100 against US Dollar ahead of US NFP
- The Pound Sterling jumps to near 1.3160 against the US Dollar ahead of the US NFP report for September.
- The probability of the Fed cutting interest rates by an additional 75 bps by year-end has waned significantly.
- BoE’s Bailey emphasized the need to cut interest rates aggressively.
The Pound Sterling (GBP) finds buying interest near the round-level support of 1.3100 against the US Dollar (USD) in Friday’s London session. The GBP/USD pair moves higher to 1.3160 after a three-day losing spree. However, the near-term outlook of the pair is uncertain, with investors focusing on the United States (US) Nonfarm Payrolls (NFP) report for September, which will be released at 12:30 GMT.
Market participants will keenly focus on the US NFP data as it will provide fresh cues about current US labor market health. The US Federal Reserve (Fed) started its policy-easing cycle with a larger-than-usual interest rate cut of 50 basis points (bps) in September, with officials aiming to revive labor market strength amid a decline in price pressures.
The official employment data is expected to show that US employers hired 140K job-seekers, marginally lower than August’s reading of 142K. The Unemployment Rate is estimated to have remained steady at 4.2%.
Investors will also pay close attention to the Average Hourly Earnings data, a key measure of wage inflation that influences consumer spending, which is expected to have grown steadily by 3.8% year-over-year. The monthly wage growth measure is seen growing by 0.3%, slower than 0.4% in August.
The labor market data will significantly influence the Fed’s monetary policy action for the remaining two meetings this year. According to the CME FedWatch tool, the likelihood of the Fed cutting interest rates further by 75 basis points (bps) by year-end reduced to 55% from 79% a week ago.
Daily digest market movers: Pound Sterling outperforms its major peers
- The Pound Sterling outperforms against its major peers on Friday. However, it is expected to face pressure due to tensions between Iran and Israel having converted into a full-fledged war after the assassination of Hezbollah leader Hassan Nasrallah. Oil prices have rallied amid tensions in the Middle East. Historically, a sharp rise in energy prices weighs on the currencies of those economies that rely heavily on imported oil, as it results in higher foreign outflows for them.
- Besides that, BoE Governor Andrew Bailey’s commentary on the interest rate outlook on Thursday has also dampened Sterling’s outlook. The comments from Baily in an interview with the Guardian newspaper appeared dovish as he stressed the need to cut interest rates aggressively if price pressures continue to ease.
- Bailey said the BoE could become "a bit more activist" and "a bit more aggressive" in its approach to lowering rates if there was further welcome news on inflation for the central bank, Reuters reported.
- On the economic front, the revised S&P Global/CIPS Construction PMI estimate has come in significantly higher at 57.2 unexpectedly. The Construction PMI, which gauges activities in the construction sector, was expected to have expanded at a slower pace to 53.1 from the preliminary estimates of 53.6.
Technical Analysis: Pound Sterling finds cushion near 50-day EMA
The Pound Sterling finds temporary support near the 50-day Exponential Moving Average (EMA), which stands around 1.3115, against the US Dollar. The GBP/USD gains ground after a sharp correction to near 1.3090 on Thursday from a more than two-year high of 1.3430 registered on September 26.
The 14-day Relative Strength Index (RSI) declines within the 40.00-60.00 range, suggesting a weakening of momentum.
More downsides could drag the Cable towards the trendline around 1.3060, plotted from the December 28, 2023, high of 1.2828. The pair delivered a sharp upside move after a breakout of this line on August 21. Looking up, the 20-day EMA near 1.3234 will be a major barricade for 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, 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.
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