- The British Pound struggles to gain ground near 1.3100 against the US Dollar as traders reduce bets on a big Fed rate cut.
- The US NFP report for September showed a strong increase in payrolls and wage growth.
- Rising tensions in the Middle East weigh heavily on risk-sensitive assets.
The British Pound (GBP) remains on the defensive near the key 1.3100 level against the US Dollar (USD) in the London session on Monday. The GBP/USD pair faces pressure as the US Dollar maintains gains near a nearly seven-week high, driven by robust growth in the United States (US) Non-Farm Payrolls (NFP) for September, released on Friday. The US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, extends its winning streak for the sixth day of trading on Monday to near 102.50.
All components of the US labor market report for September pointed to a resilient economy. New payrolls stood at 254K, the highest level seen since March, and the unemployment rate fell to 4.1%. Average hourly earnings, a key measure of wage growth that drives consumer spending, rose at a robust 4% year over year.
Surprisingly upbeat labor market data forced traders to unwind bets supporting a larger-than-usual 50 basis points (bps) rate cut by the Federal Reserve (Fed) in November. According to the CME FedWatch tool, the likelihood of the Fed cutting interest rates by 50 bps has been completely eliminated, and a rate cut of a quarter to a percentage point is now widely anticipated.
On Friday, Fed Bank of Chicago President Austan Goolsbee called the latest U.S. jobs report “superb.” He added, “If we get more reports like this, I’ll feel a lot more confident that we are, in fact, settling into full employment,” Reuters reported.
Looking ahead, investors will focus on US Consumer Price Index (CPI) data for September, due out on Thursday. Inflation data will provide more clarity on the Fed’s likely action on interest rates in November.
Daily Market Summary: Sterling weakens amid discouraging market climate
- The British Pound performs weakly against its major peers at the start of the week. The British currency is facing pressure due to discouraging market sentiment over rising tensions between Iran and Israel in the Middle East region. Israel escalated attacks in Beirut and its southern suburbs on Sunday after Israeli Prime Minister Benjamin Netanyahu vowed to win.
- Ongoing tensions in the Middle East region have deepened oil supply chain shrinkage risks, resulting in a sharp rise in energy prices. This could lead to greater capital outflows from oil-importing economies.
- Aside from the cautious mood in the market, rising expectations that the Bank of England (BoE) will cut interest rates again in November has also weighed on the British pound. Last week, comments from BoE Governor Andrew Bailey in an interview with The Guardian newspaper indicated that the central bank could be a little more aggressive in its approach to cutting interest rates if inflationary pressures continue to ease.
- By contrast, BoE chief economist Huw Pill advised cutting interest rates gradually in his speech at the Institute of Chartered Accountants of England and Wales on Friday. Pill said, “While further bank rate cuts are expected if the economic and inflation outlook broadly evolves as expected, it will be important to guard against the risk of cutting rates too much or too quickly.”
- This week, the main trigger for the British pound will be the monthly Gross Domestic Product (GDP) data and factory data for August, which will be released on Friday.
Technical Analysis: Sterling oscillates within Friday’s range
The British pound is trading within Friday’s trading range, with investors focused on US CPI data for September. The GBP/USD pair is expected to remain on the defensive as it struggles to hold the 50-day EMA, which is trading around 1.3110. Cable is at a decisive point near the ascending trend line from the December 28, 2023 high of 1.2827.
The 14-day Relative Strength Index (RSI) declines within the range of 40.00-60.00, suggesting a loss of bullish momentum. However, the bullish trend remains intact.
Looking up, the 20-day EMA near 1.3234 will be a big barrier for the British Pound bulls. On the downside, the pair would find support near the psychological figure of 1.3000.
The British Pound FAQs
The British Pound (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, with 12% of all transactions and an average of $630 billion per day, according to 2022 data.
Its key currency pairs are GBP/USD, also known as “Cable”, which represents 11% of the forex market, GBP/JPY, or the “Dragon” as it is known to traders (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
The most important factor influencing the value of the Pound Sterling 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”, that is, a stable inflation rate of around 2%. Its main tool to achieve this is the adjustment of interest rates.
When inflation is too high, the Bank of England tries to contain it by raising interest rates, which makes access to credit more expensive for individuals and companies. This tends to be 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 projects that generate growth.
The published data gauges the health of the economy and may influence the value of the Pound sterling. 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 Pound. Otherwise, if economic data is weak, the pound is likely to fall.
Another significant data 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 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 wishing 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.
