Pound Sterling gains on upbeat UK job growth, US inflation remains key
- The Pound Sterling adds nominal gains against the US Dollar after the release of mixed UK labor market data.
- An expected decline in the UK wage growth would prompt BoE interest rate cut prospects for this month.
- Investors await the US inflation data for fresh guidance on the Fed interest rate cut path.
The Pound Sterling (GBP) trades slightly higher against its major peers in Tuesday’s London session after the release of the mixed United Kingdom (UK) Employment report for the three months ending in July. The British currency strengthens as the UK Office for National Statistics (ONS) reported a robust labor demand, while the wage growth eased broadly in line with expectations.
The agency reported that the ILO Unemployment Rate expectedly declined to 4.1% from the prior release of 4.2%. UK employers hired 265K new workers, significantly higher than the former release of 97K. Historically, robust job growth boosts hawkish Bank of England (BoE) bets. Still, it is less likely to be in this scenario as Average Earnings data, a wage growth measure that drives inflation in the service sector, has decelerated expectedly.
BoE policymakers have remained worried about persistent inflation due to high inflation in the services sector. A slowdown in the wage growth momentum would relieve them and boost market speculation for BoE interest rate cuts this month.
Average Earnings Excluding Bonuses came in at 5.1%, as expected, lower than the former release of 5.4%. The wage growth data, including bonuses, decelerated faster than expected to 4%, from estimates of 4.1% and the prior reading of 4.6%, upwardly revised from 4.5%.
Daily digest market movers: Pound Sterling gains slightly against US Dollar
- The Pound Sterling edges higher but remains below the crucial resistance of 1.3100 against the US Dollar (USD) in Tuesday’s European session. The GBP/USD pair gains slightly, but its near-term outlook remains uncertain as the US Dollar holds Monday’s gains.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to gains near 101.60, with investors focusing on the United States (US) Consumer Price Index (CPI) data for August, which will be published on Wednesday.
- Though the Fed is almost certain to start reducing interest rates this month, the inflation data will influence market speculation for the likely interest rate cut size. According to the CME FedWatch tool, the possibility for the Fed reducing interest rates by 50 basis points (bps) to 4.75%-5.00% in September is 29%, while the rest favors a 25-bps interest rate cut.
- The likelihood of a Fed's large interest rate cut has somewhat declined since the release of the US Nonfarm Payrolls (NFP) data for August on Friday, which indicated that the slowdown in the job growth was not as bad as it appeared in the July data.
- Meanwhile, economists estimate the annual headline US CPI to have decelerated to 2.6%, the lowest since March 2021, from July’s reading of 2.9%. The core inflation – which excludes volatile food and energy prices – is expected to have grown steadily by 3.2%. Both monthly headline and core inflation are projected to have risen 0.2%.
- Softer-than-expected US inflation data would prompt market expectations for the Fed to begin the policy-easing process aggressively. On the contrary, sticky or hot CPI figures would weaken them.
Technical Analysis: Pound Sterling hovers below 1.3100
The Pound Sterling trades in a tight range and remains vulnerable near the round-level resistance of 1.3100 against the US Dollar. The GBP/USD pair is at a make or a break as it hovers near the trendline plotted from the December 28, 2023, high of 1.2828. On August 21, the Cable delivered a sharp upside move after a breakout of the trendline mentioned above. The pair has found an intermediate cushion near the 20-day Exponential Moving Average (EMA), which trades around 1.3075.
The 14-day Relative Strength Index (RSI) declines into the 40.00-60.00 range, suggesting that the bullish momentum has concluded for now. However, the bullish trend remains intact.
Looking up, the Cable will face resistance near the round-level resistance of 1.3200 and the psychological level of 1.3500. On the downside, the psychological level of 1.3000 emerges as crucial support for the Pound Sterling bulls.
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, 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).
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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