- The Pound Sterling trades in a tight range near 1.2950 against the US Dollar ahead of a string of US economic data.
- Investors will pay close attention to US NFP for October and Q3 GDP.
- The UK budget and market speculation for the BoE interest rate path will influence the Pound Sterling.
The Pound Sterling (GBP) consolidates in a tight range near 1.2950 against the US Dollar (USD) in Monday’s London session. The GBP/USD pair trades sideways, with investors focusing on a slew of United States (US) economic data this week and the United Kingdom (UK) Autumn Forecast Statement, which will be announced on Wednesday.
The US Dollar Index (USD), which gauges Greenback’s value against six major currencies, revisits an almost three-month high at around 104.60 on Monday.
Investors will pay close attention to the US preliminary Q3 Gross Domestic Product (GDP) and the Nonfarm Payrolls (NFP) data for October, which will exhibit the current status of economic growth and labor demand, respectively. The economic data will significantly influence market speculation regarding the Federal Reserve (Fed) interest rate outlook for the remaining year.
The Fed started its policy-easing cycle with a larger-than-usual interest rate cut of 50 basis points (bps) in September as officials were worried about growing economic risks, with confidence over inflationary pressures remaining on track to the bank’s target of 2%.
For the remainder of the year, traders see the central bank reducing interest rates by 25 basis points (bps in November and December, according to the CME FedWatch tool.
Meanwhile, the uncertainty over the US presidential election will continue to support the US Dollar. In meetings at the week-long International Monetary Fund (IMF) event last week, financial experts vividly discussed the outcome of the US elections and possible consequences. As former President Donald Trump has vowed to raise tariffs on all nations, central bankers are worried that it could ramp up costs associated with global supply chain mechanism if he wins against current Vice President Kamala Harris.
Daily digest market movers: Pound Sterling could face pressure by BoE dovish bets
- The Pound Sterling exhibits a slight outperformance against its major peers on Monday ahead of the Labor’s first budget. The budget is less likely to offer higher spending by the administration as high inflation is still a major issue for the government. The Chancellor of the Exchequer will also respect commitments made in their election manifesto.
- According to Sky News, the government will honor its commitments and will not raise income tax and national insurance but is expected to hike employers’ national insurance by up to 2 percentage points. The Labor Party is expected to offer a large boost to housing affordability.
- Meanwhile, growing speculation for the Bank of England (BoE) to cut interest rates in all two remaining meetings of the year could dampen the Pound Sterling’s appeal. Market expectations for BoE to cut interest rates by 25 bps in November and December have been prompted by BoE Governor Andrew Bailey’s dovish commentary in discussions at the sidelines of the IMF meeting last week.
- “Disinflation is happening, I think, faster than we expected it to, but we have still genuine question marks about whether there have been some structural changes in the economy,” Bailey said.
Technical Analysis: Pound Sterling consolidates above 1.2900
The Pound Sterling stays in tight range above the round-level support of 1.2900 against the US Dollar (USD) in European trading hours on Monday. The GBP/USD pair remains at make or a break near the lower boundary of a Rising Channel chart formation around 1.2900 on the daily timeframe.
A bear cross, represented by the 20- and 50-day Exponential Moving Averages (EMAs) near 1.3080, suggests more weakness ahead.
The 14-day Relative Strength Index (RSI) remains in the 20.00-40.00 range, indicating an active bearish momentum.
Looking down, the 200-day EMA near 1.2845 will be a major support zone for Pound Sterling bulls. On the upside, the Cable will face resistance near the round-level resistance of 1.3100.
Nonfarm Payrolls FAQs
Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.
The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation. A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work. The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.
Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower. NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.
Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa. Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold. Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.
Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components. At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary. The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.
