Pound Sterling rises further against Greenback on weakening US job market
- The Pound Sterling rises to near 1.3500 against the US Dollar amid the US job market slowdown.
- The US government shutdown could escalate already weakening job conditions.
- BoE’s Breeden argues in favour of unwinding monetary policy restrictiveness.
The Pound Sterling (GBP) ticks up to near 1.3500 against the US Dollar (USD) during the European trading session on Thursday. The GBP/USD pair edges higher as the US Dollar (USD) remains on the backfoot, with the United States (US) job market slowing down and the government entering a shutdown.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades vulnerable near the weekly low around 97.50.
On Wednesday, the US ADP Employment Change report showed that the private sector labor force witnessed a reduction of 32K employees in September. Economists had anticipated that 50K fresh workers would be added in that period. Additionally, the report revealed that 3K employees were laid off in August compared to the fresh addition of 54K workers initially reported.
Signs of a cooling US job market have boosted expectations for more interest rate cuts by the Federal Reserve (Fed) in the remainder of the year. According to the CME FedWatch tool, traders have almost fully priced in that the Fed will cut interest rates by 25 basis points (bps) to the 3.75%-4.00% range in the policy meeting later this month.
Daily digest market movers: Pound Sterling ticks up against its peers
- The Pound Sterling trades slightly higher against its major peers, except the New Zealand Dollar (NZD), on Thursday. However, the outlook of the British currency has become uncertain as Bank of England (BoE) officials have started expressing concerns over cooling United Kingdom (UK) economic prospects.
- On Tuesday, BoE Deputy Governor Sarah Breeden warned that tight monetary policy conditions could push inflation below their 2% target, which has been a major reason forcing officials to maintain a “gradual and careful” monetary easing outlook. “Risks in holding policy too tight for too long, could pull inflation below target,” Breeden said.
- The comments from Breeden signaling a turnaround in inflationary pressures could boost expectations of more interest rate cuts by the BoE in the near term.
- At the August policy meeting, the BoE stated that price pressures would peak around 4% in September.
- In the US region, investors brace for further slowdown in the US job market as the White House has warned that they could announce mass lay-offs in the wake of the government shutdown. "Unfortunately, because the Democrats shut down the government, the president has directed his Cabinet and the Office of Management and Budget is working with agencies across the board to identify where cuts can be made, and we believe that layoffs are imminent," White House press secretary Karoline Leavitt said, Reuters reported.
- In Thursday’s session, the US Department of Labour is unlikely to post the Initial Jobless Claims data for the week ending September 27, as the government remains shut down at the time of writing.
Technical Analysis: Pound Sterling extends winning streak
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The Pound Sterling extends its winning streak against the US Dollar for the fifth trading day on Thursday. The GBP/USD pair strives to extend its upside above the 20-day Exponential Moving Average (EMA), which trades around 1.3485. The return of the Cable above the 20-day EMA will shift the near-term trend to positive.
However, the pair would remain sideways if the 14-day Relative Strength Index (RSI), currently at 50.61, stays in the 40.00-60.00 range.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the September 17 high of 1.3726 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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