Pound Sterling outperforms as UK employment data meets expectations
- The Pound Sterling gains sharply against its major peers after the release of the UK employment data.
- The UK ILO Unemployment Rate came in steady at 4.7%, as expected.
- Investors expect the Fed to cut interest rates on Wednesday.
The Pound Sterling (GBP) attracts bids against its major peers on Tuesday, reaching its highest level in more than two months against the US Dollar, after the release of the United Kingdom (UK) labor market data for the three months ending July. The Office for National Statistics (ONS) reported that the Unemployment Rate remained steady at a four-year high of 4.7%, as economists had expected.
The UK economy created fresh 232K jobs in the quarter ending July, very close to estimates of 220K and the prior reading of 239K. Meanwhile, Average Earnings excluding bonuses, a key measure of wage growth, rose at an annual pace of 4.8%, as expected, slower than the previous 5%. Average Earnings including bonuses, a closely tracked indicator by the Bank of England, also rose in line with expectations at 4.7%, higher than the previous reading of 4.6%.
Steady employment conditions are expected to offer relief to Bank of England (BoE) officials, who had warned of growing labor market concerns. BoE Governor Andrew Bailey said earlier this month that he is “more concerned about downside job risks” than other Monetary Policy Committee (MPC) members who voted to keep rates on hold in the August monetary policy meeting.
Investors brace for more volatility in the British currency this week as the Consumer Price Index (CPI) data for August and the BoE’s monetary policy announcement are scheduled for Wednesday and Thursday, respectively.
The UK CPI report is expected to show that the headline inflation rose to 3.9% on an annual basis from 3.8%. Signs of inflationary pressures accelerating would boost hopes that the BoE will keep interest rates on hold at 4% on Thursday.
Daily digest market movers: Pound Sterling strengthens against US Dollar
- The Pound Sterling jumps to near 1.3630 against the US Dollar (USD) during Tuesday’s European session after the release of the UK employment data. The strength in the GBP/USD pair is also driven by weakness in the US Dollar.
- During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, revisits a seven-week low near 97.00.
- The US Dollar faces selling pressure as traders are increasingly confident that the Federal Reserve (Fed) will cut interest rates on Wednesday. According to the CME FedWatch tool, there is a 96% chance that the Fed will reduce interest rates by 25 basis points (bps) to 4.00%-4.25%, while the rest support a bigger reduction of 50 bps.
- The reasoning behind firm Fed dovish speculation is growing downside United States (US) labor market risks . Lately, a majority of Federal Open Market Committee (FOMC) members, including Chair Jerome Powell, argued in favor of monetary policy expansion amidst slowing job demand.
- On Wednesday, investors will pay close attention to the monetary policy statement, the dot plot and Powell’s press conference to get cues about the monetary policy and the labor market outlook. Investors would also focus on cues regarding the impact of tariffs on inflation.
- In Tuesday’s session, investors will focus on the US Retail Sales data for August, which will be published at 12:30 GMT. Sales are expected to grow by 0.3% on a monthly basis, slower than the prior 0.5% increase.
Technical Analysis: Pound Sterling breaks out from Ascending Triangle
The Pound Sterling climbs to near 1.3630 against the US Dollar on Tuesday. With the latest jump, the GBP/USD pair breaks out from an Ascending Triangle formation.
The horizontal resistance of the above-mentioned chart pattern is plotted from the July 23 high around 1.3585, while the upward-sloping border is drawn from the August 1 low near 1.3140.
A decisive breakout of the Ascending Triangle chart pattern could result in a fresh upside move.
The near-term trend of the Cable remains bullish as it trades close to the 20-day Exponential Moving Average (EMA), which is around 1.3520.
The 14-day Relative Strength Index (RSI) breaks above 60, indicating a strong upside momentum.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the July 1 high near 1.3800 will act as a key barrier.
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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