- The Pound Sterling hovers near 1.2800 against the US Dollar with a focus on the US NFP data.
- Investors see the BoE delivering two interest-rate cuts this year.
- The USD Index holds the 104.00 support even though traders raise Fed rate-cut bets.
The Pound Sterling (GBP) trades close to a two-month high slightly below the round-level figure of 1.2800 against the US Dollar (USD) in Thursday’s London session. The GBP/USD pair holds strength as the US Dollar weakens due to growing speculation that the Federal Reserve (Fed) will start reducing interest rates from September.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls back to the crucial support of 104.00.
According to the CME FedWatch tool, 30-day Fed Funds futures pricing data suggests a roughly 68% chance of interest rates declining from their current levels in September, higher than the 50% recorded a week ago. Investors are also pricing in two rate cuts by the Fed this year.
Market speculation for Fed rate cuts has strengthened after recent data pointed to a slowdown in the United States (US) economy via easing labor demand and weak factory data. This week, the US JOLTS Job Openings data came in lower than expected for April and the ADP Employment Change failed to beat estimates in May. Also, the US Manufacturing PMI report for May showed that factory activity contracted for the second straight month and the forward demand is vulnerable. This string of weak economic data seems to have offset the upbeat ISM Services PMI released on Wednesday, which signalled that the US services sector swang back to expansion in May.
Daily digest market movers: Pound Sterling hovers around two-month high at 1.2800
- The Pound Sterling trades broadly steady near 1.2800 against the US Dollar as the global rate-cut cycle picks up pace after the Bank of Canada (BoC) announced on Wednesday an interest-rate cut, becoming the first G7 central bank to do so in the current cycle. The BoC reduced interest rates by 25 basis points (bps) as expected. Also, the European Central Bank (ECB) is widely anticipated to reduce its Deposit Facility Rate by 25 bps in Thursday’s late European session. The Bank of England (BoE) and the Fed are expected to follow suit later this year.
- The Fed is expected to start lowering its key borrowing rates from the September meeting. However, expectations could shift significantly once the US Nonfarm Payrolls (NFP) report for May is published on Friday.
- The US NFP is estimated to report that hiring remained robust in May, with employers adding 185K payrolls, higher than the prior release of 175K. The Unemployment Rate is expected to remain steady at 3.9%.
- Investors will also focus on the Average Hourly Earnings data, which gauges wage growth and has remained a major barrier to progress in the disinflation process. Annual Average Hourly Earnings are forecasted to have grown steadily by 3.9%, while on a monthly basis wages are expected to have grown 0.3%, higher than the prior reading of 0.2%. Higher-than-expected payrolls and wage growth would force traders to push back Fed rate-cut bets while soft numbers will do the opposite.
- On the other side of the Atlantic, the United Kingdom’s (UK) economic calendar has nothing much to offer this week. But next week, investors will look into Employment data for the February-April period and the monthly Gross Domestic Product (GDP) data for April. These economic data will significantly impact market expectations for Bank of England (BoE) rate cuts. Currently, investors expect that the BoE will deliver two rate cuts this year and will initiate the policy-easing cycle from the August meeting.
Technical Analysis: Pound Sterling aims to stabilize above 78.6% Fibonacci retracement
The Pound Sterling trades back and forth around 1.2800 against the US Dollar. The GBP/USD pair struggles to stabilize above 1.2800 ahead of the US NFP data on Friday. The near-term outlook of the Cable remains firm as it trades above 1.2770, the 78.6% Fibonacci retracement support (plotted from the March 8 high of 1.2900 to the April 22 low at 1.2300).
The Cable is expected to remain in the bullish trajectory as the 20-day and 50-day Exponential Moving Averages (EMAs) at 1.2710 and 1.2650, respectively, are sloping higher, indicating a strong uptrend.
The 14-period Relative Strength Index (RSI) has shifted into the 60.00-80.00 range, suggesting that the momentum has leaned toward the upside.
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.
