Pound Sterling soars on upbeat UK Employment data, US Inflation in focus

Source Fxstreet
  • Pound Sterling jumps strongly on upbeat UK labor market data, higher wage growth.
  • The growth in average earnings was higher than expected, allowing BoE to maintain a hawkish narrative.
  • The US inflation data will guide further action in the GBP/USD pair.

The Pound Sterling (GBP) discovers a stellar buying interest in Tuesday’s early European session as the United Kingdom Office for National Statistics (ONS) has reported upbeat employment data for the three months ending December. The labor demand remains upbeat, and Average Earnings rose at a higher pace than the expectations of market participants.

Hiring from UK employers remained strong as business owners are optimistic about the economic outlook due to receding recession fears, easing price pressures, and hopes of rate cuts by the Bank of England (BoE).

While wage growth momentum was higher than market expectations, the pace was slower than readings in the three months ending December. This indicates that progress in the labor cost declining towards the required 2% target level has slowed. It suggests the BoE will be able to maintain an argument in favor of keeping interest rates at their current level for a more extended period. This has boosted the Pound Sterling as higher interest rates tend to attract more foreign inflows.

Investors brace for higher volatility in the GBP/USD pair as the United States Bureau of Labor Statistics (BLS) will report January's Consumer Price Index (CPI) data on Tuesday. The appeal for the GBP/USD will strengthen if the inflation data remains softer than expected. The US Dollar would face a sell-off as soft inflation data would allow the Fed to adopt a dovish interest rate stance sooner, which will increase foreign outflows

Daily Digest Market Movers: Pound Sterling jumps on upbeat labor demand

  • Pound Sterling witnesses strong buying interest as the United Kingdom ONS has reported upbeat Employment data for three months ending December.
  • The Unemployment Rate falls significantly to 3.8% against expectations of 4.0% and the prior reading of 4.2%.
  • UK employers recruited 72K workers in December, similar to 73K labor additions in November.
  • In January, Claimant Count Change were higher at 14.1K against 5.5K reading in December.
  • The reduction in Average Earnings (both with and without bonuses) for three months ending December was slower than expected, which is expected to allow Bank of England policymakers to push back expectations of early rate cuts.
  • Average Earnings Excluding Bonus' grew by 6.2% against expectations of 6.0% and the former release of 6.7% (revised from 6.6%). The economic data including bonuses rose at a higher pace of 5.8% against the consensus of 5.6% but remained slower than the prior reading of 6.7% (revised from 6.5%).
  • The outlook for the Pound Sterling remains upbeat as investors hope the BoE will start reducing its benchmark rates after the Federal Reserve (Fed).
  • The CME FedWatch tool shows that the Fed will start unwinding its restrictive monetary policy stance in May.
  • The current outlook on interest rates by the Fed will be impacted after the release of the United States inflation data for January, which will be published at 13:30 GMT.
  • According to the estimates, the headline inflation grew at a slower pace of 3.0% against 3.4% in December. In the same period, core inflation that excludes volatile food and oil prices decelerated slightly to 3.8% from 3.9%.
  • Investors anticipate the monthly headline rose steadily by 0.2% and core inflation fell by 0.3%.
  • A soft inflation report would raise expectations of an early rate cut by the Fed in January.

Technical Analysis: Pound Sterling sets to refresh weekly high above 1.2660

Pound Sterling advances vertically to 1.2640 on upbeat labor market data. The GBP/USD pair aims to print a fresh weekly high above 1.2655. The asset aims to sustain above the 50-day Exponential Moving Average (EMA), which trades around 1.2636. The outlook for the Pound Sterling would strengthen if it climbs above the 20-day EMA, which trades near 1.2660.

The 14-period Relative Strength Index (RSI) rebounds from 40.00, which indicates that market participants have utilized the correction as a buying opportunity. A bullish momentum would emerge if the RSI (14) climbs above 60.00.

Pound Sterling FAQs

What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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