GBP/USD bounces back strongly above 1.2800 as US NFP disappoints
|- GBP/USD rises above 1.2800 on disappointing US NFP and higher jobless rate.
- The USD Index posts a fresh four-month low near 103.30 after a weak labor market report.
- The BoE commenced its policy-easing campaign on Thursday.
The GBP/USD pair recovers at a strong pace from an intraday low of 1.2707 above the round-level resistance of 1.2800 in Friday’s New York session. The Cable discovers strong buying interest on disappointing United States (US) Nonfarm Payrolls (NFP) data for July, which boosts already firm speculation of Federal Reserve (Fed) September interest rate cuts.
Fresh payrolls came in lower at 114K than estimates of 175K and June’s reading of 179K. The Unemployment Rate jumps to 4.3%, the highest since November 2021, from expectations and the prior release of 4.1%. The report suggests the consequences of higher interest rates by the Fed on the labor market.
The NFP report cleared that risks have now widened to both factors of the Fed’s dual mandate. Meanwhile, annual Average Hourly Earnings have decelerated at as faster-than-expected pace to 3.6% from the estimates of 3.7% and the former release of 3.8%. Also, the wage growth measure rose at a slower pace of 0.2%. A steep cut on individuals’ finances will weaken overall spending.
In the monetary policy announcement, Fed Chair Jerome Powell commented that rate cuts could be 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 Greenback’s value against six major currencies, dives to a fresh four-month low near 103.30.
On the other side of the Atlantic, the Pound Sterling remains mixed against its major peers after the expected interest rate-cut decision by the Bank of England (BoE) on Thursday. The BoE reduced key borrowing rates by 25 basis points (bps) to 5%, with a 5-4 vote split. Over the interest rate outlook, BoE Governor Andrew Bailey commented in the press conference that the central bank won’t follow an aggressive policy-easing stance.
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.
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