Pound Sterling moves higher with eyes on US NFP
- The Pound Sterling recovers further to 1.2550 amid an improved market mood and a decline in the US Dollar.
- The BoE is expected to start reducing interest rates from the September meeting.
- Investors should brace for high volatility ahead of US NFP at 12:30 GMT.
The Pound Sterling (GBP) rises to 1.2550 against the US Dollar (USD) in Friday’s London session. The GBP/USD pair strengthens as financial markets see the Bank of England (BoE) reducing interest rates from the September meeting, more or less in line with expectations of the US Federal Reserve making a similar move. Earlier, investors were divided between the June or August meeting.
The speculation about the BoE pivoting to interest rate cuts has been postponed as investors remain worried about strong wage growth in the United Kingdom, which is feeding the core Consumer Price Index (CPI), the central bank’s preferred inflation measure.
For the headline inflation, BoE Governor Andrew Bailey said he is confident that it will return to the desired rate of 2%. The next BoE’s monetary policy decisionich will be announced on May 9, and markets expect the bank to hold interest rates steady at 5.25%. Investors will keenly focus on whether Andrew Bailey sticks to its statement that expectations for two or three rate cuts are reasonable this year, as stated in March’s policy meeting.
Daily digest market movers: Pound Sterling holds strength while US Dollar trades around three-week low
- The Pound Sterling extends its recovery to 1.2550 against the US Dollar as the market sentiment is positive despite uncertainty ahead of the release of the United States Nonfarm Payrolls (NFP) and the ISM Services Purchasing Managers Index (PMI) reports for April. The S&P 500 sharply recovered on Thursday gaining around 0.90% and suggesting a higher risk appetite of investors.
- US nonfarm employers are expected to have recruited 238K workers in April, lower than the former reading of 303K. The Unemployment Rate is estimated to remain steady at 3.8%. Investors will keenly focus on the Average Hourly Earnings data, which will provide a fresh inflation outlook. The annual wage growth is expected to have softened to 4.0% from 4.1% in March, with monthly figures increasing steadily by 0.3%.
- Strong labor demand and higher wage growth would allow the Federal Reserve to delay rate cut plans while signs of labor market conditions easing will boost rate cut bets, which are currently anticipated in the September meeting.
- The ISM Services PMI, which represents the service sector that accounts for two-thirds of the economy, is expected to rise to 52.0 from 51.4 in March.
- Apart from the cheerful market mood, a sharp decline in the US Dollar has also strengthened the GBP/USD pair. The US Dollar Index (DXY) trades close to a three-week low around 105.20, weighed down by weak Q1 Nonfarm Productivity data combined with Fed’s less hawkish guidance on interest rates than feared.
- The Q1 Nonfarm Productivity data, which reflects hourly output per worker, grew at a significantly slower pace of 0.3% from expectations of 0.8% and a strong reading of 3.5% in the last quarter of 2023.
- On Wednesday, investors observed that the Fed remains leaning towards easing restrictive policy this year after listening to the monetary policy statement and Fed Chair Jerome Powell’s press conference. Jerome Powell acknowledged that progress in disinflation has stalled but remains hopeful that rate cuts are eventual this year. The Fed also slowed the pace of tapering the balance sheet. The Fed said that starting on June 1 it will reduce the cap on Treasury securities it allows to mature and not be replaced to $25 billion from its current cap of up to $60 billion per month, Reuters reported.
Technical Analysis: Pound Sterling extends winning streak and rises to 1.2550
The Pound Sterling extends its winning spell for the third trading day on Friday. The GBP/USD pair holds gains above the psychological support of 1.2500. The near-term outlook of the Cable is upbeat as it holds above the 20-day Exponential Moving Average (EMA), which trades around 1.2520. While the long-term outlook is uncertain as the asset has yet not delivered a decisive break above the 200-day EMA near 1.2555.
The pair continues to face pressure near the neckline of the Head and Shoulder pattern. On April 12, Cable witnessed an intense sell-off after breaking below the neckline of the H&S pattern plotted from December 8 low around 1.2500.
The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.
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.