Pound Sterling holds gains against US Dollar as traders raise Fed interest rate cut bets
- The Pound Sterling exhibits strength against the US Dollar near 1.3300 as soft US NFP data on Friday boosted Fed dovish bets.
- The US economy added 73K fresh workers in July, lower than estimates of 110K.
- Investors expect the BoE to cut interest rates on Thursday.
The Pound Sterling (GBP) holds onto Friday’s gains around 1.3300 against the US Dollar (USD) during the European trading session on Monday. The GBP/USD pair shows strength as the US Dollar (USD) licks its wounds following the sharp decline registered on Friday after the release of the United States (US) Nonfarm Payrolls (NFP) data for July.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades close to Friday’s low of around 98.60.
The US NFP report showed that labor market conditions have cooled down significantly. According to the report, the economy created fresh 73K jobs, significantly lower than expectations of 110K. Also, employment figures for June and May were revised down sharply. The Unemployment Rate accelerated to 4.2%, as expected, from the previous 4.1%.
Cooling labor market conditions have paved the way for interest rate cuts by the Federal Reserve (Fed) in the September policy meeting. According to the CME FedWatch tool, the probability of the Fed to cut interest rates next month has increased to 80.8% from the 41.2% seen on Thursday, a day before the release of the NFP data.
Meanwhile, the sudden resignation of Fed Governor Adriana Kugler has also increased hopes that the Fed could resume its monetary-easing cycle from September. Market experts believe that decisions from the new Governor appointed by US President Trump to replace Kugler will be biased towards his economic agenda.
"Kugler’s resignation allows the president to further shape the FOMC (Federal Open Market Committee) in his own image,” analysts at Harris Financial Group said, Reuters reports.
Daily digest market movers: Pound Sterling to be influenced by BoE’s action
- The Pound Sterling demonstrates a mixed performance against its major peers at the start of the week. Investors brace for a volatile week for the British currency as the Bank of England (BoE) is scheduled to announce its monetary policy decision on Thursday.
- Traders are almost fully pricing in a 25 basis points (bps) interest rate reduction by the BoE this week, according to a report from Reuters. The BoE is seen performing a delicate balancing act while guiding the interest rate outlook amid escalating price pressures and cooling labor market conditions.
- Employment data for the three-months ending May and the Consumer Price Index (CPI) data for June showed a slower hiring trend and a higher-than-expected increase in headline and core inflation.
- This week, investors will also focus on the revised S&P Composite and Services PMI data for July, which are scheduled to be released on Tuesday. The preliminary estimates showed that the Composite PMI stood at 51.0, signaling that the economy grew at a moderate pace.
- On Tuesday, investors will also focus on the US revised S&P Global and ISM Services PMI data for July. The ISM Services PMI is seen ticking up to 51.5 from 50.8 in June.
- Meanwhile, US President Trump's firing of Bureau of Labor Statistics (BLS) Commissioner Erika McEntarfer has raised doubts over the credibility of the US data among investors. On Friday, Trump fired McEntarfer after the release of the NFP report for "faking job numbers".
Technical Analysis: Pound Sterling stays on back foot despite recovery against US Dollar
The Pound Sterling holds near 1.3300 against the US Dollar on Monday. However, the outlook of the pair remains bearish as the breakdown from the Head and Shoulders (H&S) chart pattern remains intact and the 20-day Exponential Moving Average (EMA) slopes downwards to near 1.3400. The neckline of the H&S pattern is plotted around 1.3360.
The 14-day Relative Strength Index (RSI) oscillates below 40.00, almost reaching oversold levels, indicating that the bearish momentum is intact.
Looking down, the May 12 low of 1.3140 will act as a key support zone. On the upside, the July 30 high near 1.3385 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.