Pound Sterling steadies against US Dollar ahead of US Nonfarm Payrolls
- The Pound Sterling holds onto recent gains near 1.2770 against the USD ahead of the US labor market data for November, which will be published at 13:30 GMT.
- Investors expect the Fed to cut interest rates by 25 bps in the policy meeting on December 18.
- BoE hawk Megan Greene warned on Thursday that UK inflation may remain above the 2% target in the medium term.
The Pound Sterling (GBP) holds onto gains near 1.2770 against the US Dollar (USD) in European trading hours on Friday. The GBP/USD pair gained sharply on Thursday after the release of the United States (US) Initial Jobless Claims data for the week ending November 29, which showed that individuals claiming jobless benefits for the first time increased to 224K against the estimates and the previous week’s reading of 215K.
The Cable is expected to trade muted ahead of the release of the US Nonfarm Payrolls (NFP) data for November at 13:30 GMT. Investors will pay close attention to the US official labor market data to get fresh cues about whether the Federal Reserve (Fed) will cut interest rates in its policy meeting on December 18. The Fed started its policy-easing cycle in September as officials were worried about deteriorating labor demand and were confident about inflation returning to the bank’s target of 2%.
Economists expect the US economy added 200K fresh workers, significantly higher than the 12K increase seen in October. Payroll growth was significantly lower last month as some industries were affected by the hurricanes and there were labor strikes at Boeing plants. The Unemployment Rate is estimated to have increased to 4.2% from 4.1%.
Investors will also focus on the Average Hourly Earnings data, a key measure for wage growth,, which is expected to have grown by 3.9%, slower than 4% in October on a year-on-year basis. On a monthly basis, wage growth measure is estimated to have risen at a slower pace of 0.3% from the former reading of 0.4%.
Signs of a slowdown in labor demand and moderate wage growth would boost Federal Reserve (Fed) dovish bets for the policy meeting on December 18. On the contrary, strong job data would weaken them. Currently, there is a 72% chance that the Fed will reduce interest rates by 25 basis points (bps) to 4.25%-4.50% this month, while the rest supports leaving interest rates unchanged, according to the CME FedWatch tool.
Daily digest market movers: Pound Sterling outperforms its major peers
- The Pound Sterling performs strongly against its major peers on Friday as Bank of England (BoE) officials showed concerns over price pressures remaining persistent. BoE Monetary Policy Committee (MPC) external member Megan Greene said on Thursday that UK inflation could remain above the 2% target in the medium term as it is becoming “fundamentally more persistent,” Bloomberg reports.
- Mega Green’s doubts over the central bank bringing inflation within the desired range were backed by the assumption that wage growth remains persistent. “Wage growth is not falling as quickly as I would like,” Greene said.
- On Wednesday, BoE Governor Andrew Bailey also emphasized that the central bank has still some work to do to bring inflation down below the bank’s target of 2% but was confident that the disinflation process is well embedded.
- Due to the absence of critical United Kingdom (UK) economic indicators in the near term, market speculation for the likely interest rate decision by the BoE in the monetary policy meeting on December 19 will drive the Pound Sterling’s valuation. Traders expect that the BoE will leave interest rates unchanged at 4.75%.
Technical Analysis: Pound Sterling stays above 20-day EMA
The Pound Sterling holds onto Thursday’s upside move near 1.2770 against the US Dollar (USD) in Friday’s London session. The GBP/USD pair steadies above the 20-day Exponential Moving Average (EMA) around 1.2715 and aims to sustain above it. However, the broader outlook remains bearish as the pair stays below the 200-day Exponential Moving Average, which trades around 1.2825.
The 14-day Relative Strength Index (RSI) has rebounded to neutral levels after turning oversold on November 22. However, the downside bias is still intact.
Looking down, the pair is expected to find a cushion near the upward-sloping trendline around 1.2500, which is plotted from the March 2023 low near 1.1800. On the upside, the 200-day EMA will act as key resistance.
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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