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Pound Sterling clings to gains ahead of UK employment, US inflation data

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Pound Sterling clings to gains ahead of UK employment, US inflation data

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May 13, 2024February 12, 2023
Pound Sterling clings to gains ahead of UK employment, US inflation data

  • The Pound Sterling holds gains above 1.2500 inspired by strong UK Q1 GDP data.
  • The UK economy expanded by 0.6%, moving out of the recession seen in the second half of 2023.
  • Investors await UK employment and US inflation data for fresh guidance.

The Pound Sterling (GBP) exhibits strength above the psychological support of 1.2500 against the US Dollar (USD) in Monday’s London session. The GBP/USD pair holds firmly as the US Dollar struggles to recover higher-than-expected Initial Jobless Claims for the week ending May 3, which raised concerns over the health of the United States labor market. 

The confidence of financial markets for the US Federal Reserve (Fed) to start lowering interest rates from the September meeting has increased as US labor market conditions have cooled down. For now, investors shift their focus to the US Consumer Price Index (CPI) data for April, which will be published on Wednesday. 

Annual headline CPI is forecasted to have softened to 3.4% from 3.5% in March. In the same period, the core inflation, which strips off volatile food and energy prices, is anticipated to have decelerated to 3.6% from the prior reading of 3.8%. Economists expect that the monthly headline and core CPI have grown at a slower pace of 0.3% from the prior reading of 0.4%. 

Daily digest market movers: Pound Sterling rises on multiple tailwinds

  • The Pound Sterling holds strength inspired by the robust UK Q1 Gross Domestic Product (GDP) data released on Friday. The United Kingdom Office for National Statistics (ONS) reported that the economy expanded at a stronger pace of 0.6%, beating estimates of 0.4%. This led to an end to the technical recession registered in the second half of 2023.
  • After the GDP data, UK Chancellor Jeremy Hunt said: “There is no doubt it has been a difficult few years, but today’s growth figures are proof that the economy is returning to full health for the first time since the pandemic,” Reuters reported.
  • After strong UK growth data, the strength of the UK economy will now be tested on the grounds of labor market data, which will be published on Tuesday. Economists expect that the ILO Unemployment Rate for the three months ending March rose to 4.3% from the prior reading of 4.2%. Apart from the jobless rate, investors will keenly on the Average Earnings data that has been fuelling service inflation, which is almost double that of what should be consistent to bring inflation down to the 2% target.
  • Annual Average Earnings Including Bonuses are estimated to have slowed to 5.3% in the three months ending March from the prior reading of 5.6%. A sharp decline in the wage growth momentum would boost expectations for the BoE to begin reducing interest rates in June. 
  • Last week, the BoE kept interest rates steady at 5.25% for the sixth time in a row. Overall, the BoE’s communication indicated that it is swiftly leaning toward policy normalization. BoE Deputy Governor Dave Ramsden joined policymaker Swati Dhingra and voted for a rate cut by 25 basis points (bps) to 5.0%. In the press conference, BoE Governor Andrew Bailey said the central bank could deliver more rate cuts than investors have anticipated.

Technical Analysis: Pound Sterling recovers from 50% Fibo retracement around 1.2470

The Pound Sterling advances to 1.2540 on Monday due to multiple tailwinds. The GBP/USD pair recovered sharply from 50% Fibonacci retracement (plotted from April 22 low of 1.2299 to May 3 high of 1.2634) near 1.2470. The Cable remains sticky to the 20-day Exponential Moving Average (EMA), which trades around 1.2520, suggesting a sideways trend.

The pair is still below the neckline of the Head and Shoulder (H&S) chart pattern formed on a daily timeframe. On April 12, the Cable fell sharply after breaking below the neckline of the H&S pattern plotted from December 8 low around 1.2500.

The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.

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.