- GBP/USD rises above 1.2800 following disappointing US NFP and higher unemployment rate.
- The USD Index hits a fresh four-month low near 103.30 after a weak labor market report.
- The BoE kicked off its policy easing campaign on Thursday.
The GBP/USD pair is recovering at a strong pace from an intraday low of 1.2707 above the round-level resistance of 1.2800 in the American session on Friday. The Pound is finding strong buying interest on the disappointing US (US) Non-Farm Payrolls (NFP) data for July, which reinforces the already strong speculation of Federal Reserve (Fed) interest rate cuts in September.
New payrolls came in at 114,000, below estimates of 175,000 and the June reading of 179,000. The unemployment rate jumps to 4.3%, the highest since November 2021, from expectations and the previous release of 4.1%. The report suggests the consequences of higher interest rates by the Fed on the labor market.
The NFP report made clear that risks have now broadened to both factors of the Fed’s dual mandate. Meanwhile, average annual hourly earnings have slowed at a faster-than-expected pace to 3.6% from estimates of 3.7% and the previous release of 3.8%. In addition, the wage growth measure rose at a slower pace of 0.2%. A sharp cut in individual finances will weaken overall spending.
In the monetary policy announcement, Fed Chairman Jerome Powell commented that rate cuts could come sooner rather than later if the labor market faces unexpected risks.
Weak employment data has weighed heavily on the US Dollar (USD). The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, plunged to a fresh four-month low near 103.30.
Across the Atlantic, the British Pound remains mixed against its major peers following the Bank of England’s (BoE) expected interest rate cut decision on Thursday. The BoE cut key interest rates by 25 basis points (bps) to 5%, with the vote split 5-4. On the interest rate outlook, BoE Governor Andrew Bailey commented at the press conference that the central bank will not pursue an aggressive policy easing stance.
The British Pound 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 currency unit in the world, accounting for 12% of all transactions and an average of $630 billion a day, as of 2022.
Its key currency pairs are GBP/USD, also known as the “Cable,” which accounts for 11% of the forex market, GBP/JPY, or the “Dragon” as it is known to traders (3%), and EUR/GBP (2%). The British Pound is issued by the Bank of England (BoE).
The most important factor influencing the value of the British Pound is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on achieving its main objective of “price stability”, i.e. a stable inflation rate of around 2%. Its main tool for achieving this is the adjustment of interest rates.
When inflation is too high, the Bank of England tries to contain it by raising interest rates, making credit more expensive for individuals and businesses. This is generally positive for the GBP, as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation is too low, it is a sign that economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to make credit cheaper, so that companies borrow more to invest in growth-generating projects.
The data released gauges the health of the economy and can influence the value of the Pound. Indicators such as GDP, manufacturing and services PMIs, and employment can influence the direction of the Pound.
A strong economy is good for the British Pound. Not only does it attract more foreign investment, but it may encourage the Bank of England to raise interest rates, which will directly strengthen the British Pound. Conversely, if economic data is weak, the British Pound is likely to fall.
Another significant indicator for the pound is the trade balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports during a given period.
If a country produces highly sought-after exports, its currency will benefit exclusively from the additional demand created by foreign buyers who wish to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
