- The Pound Sterling struggles to gain ground near 1.3100 against the US Dollar as traders pare Fed large rate cut bets.
- US NFP report for September showed a sharp uptick in payrolls and wage growth.
- Growing Middle East tensions weigh heavily on risk-sensitive assets.
The Pound Sterling (GBP) remains on the backfoot near the key level of 1.3100 against the US Dollar (USD) in Monday’s London session. The GBP/USD pair faces pressure as the US Dollar holds gains to near an almost seven-week high, driven by robust growth in the United States (US) Nonfarm Payrolls (NFP) for September, released on Friday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its winning streak for the sixth trading day on Monday to near 102.50.
All components of the US labor market report for September pointed to a resilient economy. Fresh payrolls came in at 254K, the highest level seen since March, and the Unemployment Rate dropped to 4.1%. Average Hourly Earnings, a key measure of wage growth that drives consumer spending, rose at a robust pace of 4% year-over-year.
Surprisingly upbeat labor market data forced traders to unwind bets supporting a Federal Reserve’s (Fed) larger-than-usual rate cut of 50 basis points (bps) in November. According to the CME FedWatch tool, the Fed’s probability of reducing interest rates by 50 bps has been entirely wiped out, and a quarter-to-a-percentage rate cut is now widely anticipated.
On Friday, Chicago Fed Bank President Austan Goolsbee called the latest US employment report “superb”. He added, “If we get more reports like this, I’m going to feel a lot more confident that we are, in fact, settling in at full employment,” Reuters reported.
Going forward, investors will focus on the US Consumer Price Index (CPI) data for September, which will be published on Thursday. The inflation data will provide more clarity about the Fed’s likely interest rate action in November.
Daily digest market movers: Pound Sterling underperforms on dismal market mood
- The Pound Sterling exhibits a weak performance against its major peers at the start of the week. The British currency faces pressure on dismal market sentiment due to growing tensions between Iran and Israel in the Middle East region. Israel intensified strikes across Beirut and its southern suburbs on Sunday after Israeli Prime Minister Benjamin Netanyahu vowed to win.
- Ongoing tensions in the Middle East region have deepened risks of Oil supply chain reduction, which have resulted in a sharp upside in energy prices. This could lead to a higher foreign outflow from Oil-importing economies.
- Apart from the cautious market mood, rising expectations of the Bank of England (BoE) to cut interest rates again in November have also weighed on the Pound Sterling. Last week, the comments from BoE’s Governor Andrew Bailey in an interview with the Guardian newspaper indicated that the central bank could be a bit more aggressive in its approach to lower interest rates if inflationary pressures continue to decline.
- On the contrary, BoE Chief Economist Huw Pill advised cutting interest rates gradually in his speech at the Institute of Chartered Accountants in England and Wales on Friday. Pill said, “While further cuts in Bank Rate remain in prospect should the economic and inflation outlook evolve broadly as expected, it will be important to guard against the risk of cutting rates either too far or too fast.”
- This week, the major trigger for the Pound Sterling will be the monthly Gross Domestic Product (GDP) and the factory data for August, which will be released on Friday.
Technical Analysis: Pound Sterling oscillates inside Friday’s range
The Pound Sterling trades inside Friday’s trading range, with investors focusing on the US CPI data for September. The GBP/USD pair is expected to remain on the backfoot as it struggles to hold the 50-day Exponential Moving Average (EMA), which trades around 1.3110. The Cable is at make or a break near the upward-sloping trendline from the 28 December 2023 high of 1.2827.
The 14-day Relative Strength Index (RSI) declines inside the 40.00-60.00 range, suggesting a loss of bullish momentum. However, the upside trend remains intact.
Looking up, the 20-day EMA near 1.3234 will be a major barricade for the Pound Sterling bulls. On the downside, the pair would find support near the psychological figure of 1.3000.
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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