Pound Sterling slumps as UK job market deteriorates further
- The Pound Sterling underperforms its major peers as UK employment data came in weaker than projected.
- The UK ILO Unemployment Rate rose to 5% in the three months ending in September.
- The US Senate advances government spending bills to the House of Representatives.
The Pound Sterling (GBP) falls sharply against its major currency peers on Tuesday. The British currency weakens as the United Kingdom (UK) labour market data for the three months ending September has signaled that job market conditions have deteriorated further.
The Office for National Statistics (ONS) has reported that employers laid off 22K workers, compared to a fresh addition of 91K recorded in the three months ending in August. This is the first time the overall labour force has seen a reduction in employees since the three months ending in March 2024.
Additionally, the ILO Unemployment Rate has accelerated to 5%, faster than estimates of 4.9% and the prior reading of 4.8%. This is the highest level seen since March 2021.
Signs of weakening job market are expected to prompt expectations of an interest rate cut by the Bank of England (BoE) at its December policy meeting.
This week, BoE dovish expectations for the December meeting have already accelerated as the central bank eliminated “careful” from their “gradual monetary easing guidance”, while announcing the Monetary Policy Statement last Thursday.
Meanwhile, Average Hourly Earnings Excluding Bonuses, a key measure of wage growth, rose at a moderate pace of 4.6% on an annualized basis, as expected, compared to a 4.7% growth seen in the three months ending August. In the same period, Average Earnings Including Bonuses rose at a slower pace of 4.8%, compared to estimates of 4.9% and the prior reading of 5%.
Daily digest market movers: Pound Sterling weakens against US Dollar
- The Pound Sterling slumps to near 1.3130 against the US Dollar (USD) during the European trading session on Tuesday. The GBP/USD faces intense selling pressure after the release of the weaker-than-projected UK employment data.
- Meanwhile, the US Dollar trades broadly stable as the United States (US) Senate advances the government funding bill to the Republican-controlled House of Representatives. According to a Reuters report, House Speaker Mike Johnson has stated that the bill will be passed by Wednesday.
- At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades flat around 99.60.
- Meanwhile, investors await fresh cues on whether the Federal Reserve (Fed) will cut interest rates again this year. According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points (bps) to the 3.50%-3.75% range in the December meeting is 62.4%.
- It won't be challenging for investors to gauge the Fed’s interest rate expectations as federal agencies will start releasing economic data, which was halted due to the government shutdown.
- Going forward, the major trigger for the GBP/USD pair will be the United Kingdom (UK) Gross Domestic Product (GDP) data for September, as well as the preliminary reading of the GDP for the third quarter of the year, which will be published on Thursday. Economists expect the UK's Q3 GDP to have grown 0.2%, slower than the 0.3% expansion seen in the second quarter.
Technical Analysis: Pound Sterling falls to near 1.3130
The Pound Sterling declines to near 1.3130 against the US Dollar on Tuesday. The overall trend of the pair remains bearish as it trades below the 200-day Exponential Moving Average (EMA), which is around 1.3264.
The 14-day Relative Strength Index (RSI) struggles to return above 40.00. A fresh bearish momentum would emerge if the RSI resumes its downside journey.
Looking down, the April low near 1.2700 will act as a key support zone. On the upside, the October 28 high around 1.3370 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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