GBP/USD jumps higher on broad-market Greenback weakness

GBP/USD climbed towards 1.2780 on Wednesday as rate cut hopes reignite.
US data broadly missed the mark, signs of further softening mount.
UK election on Thursday could introduce a fresh round of volatility.

GBP/USD extended a near-term rebound on Wednesday, bolstered by a broad softening in US economic figures in the midweek market session. Thursday’s upcoming UK election will draw plenty of attention from Cable traders as US markets hunker down for the wait through Thursday’s market holiday.

Forex Today: The UK’s Labour Party is aiming for a landslide victory

US ADP Employment Change fell to 150K in June, down from the previous month’s 157K and missing the forecast increase to 160K. Looking deeper into the ADP’s report, many of the already-lower job additions were concentrated in lower-paying leisure and hospitality industries.

US Initial Jobless Claims also ticked up for the week ended June 28, rising to 238K week-on-week compared to the previous week’s 233K, more than the forecast 235K. The four-week average of Initial Jobless Claims also ticked higher to 238.5K from 236.25K.

US ISM Services Purchasing Managers Index (PMI) in June contracted sharply to 48.8, falling to its lowest level since June of 2020. Services PMI fell from the previous month’s 53.8, entirely undershooting the forecast decline to 52.5.

US markets will be dark on Thursday for the US Independence Day holiday, leaving Cable to churn as the UK’s Parliamentary Elections get underway. The Labour Party in the UK is widely expected to win a majority in the government, ending 14 years of Conservative party rule. Based on the latest mega polls released on Wednesday, it is anticipated that Labour will significantly outperform the Conservatives, with Keir Starmer of the Labour Party expected to replace the current Conservative Prime Minister, Rishi Sunak. According to the polling conducted by YouGov, Labour is projected to win 431 seats, while the Tories are expected to win just 102.

Economic Indicator

ISM Services PMI

The Institute for Supply Management (ISM) Services Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US services sector, which makes up most of the economy. The indicator is obtained from a survey of supply executives across the US based on information they have collected within their respective organizations. Survey responses reflect the change, if any, in the current month compared to the previous month. A reading above 50 indicates that the services economy is generally expanding, a bullish sign for the US Dollar (USD). A reading below 50 signals that services sector activity is generally declining, which is seen as bearish for USD.

Why it matters to traders?

The Institute for Supply Management’s (ISM) Services Purchasing Managers Index (PMI) reveals the current conditions in the US service sector, which has historically been a large GDP contributor. A print above 50 shows expansion in the service sector’s economic activity. Stronger-than-expected readings usually help the USD gather strength against its rivals. In addition to the headline PMI, the Employment Index and the Prices Paid Index numbers are also watched closely by investors as they provide useful insights regarding the state of the labour market and inflation.

GBP/USD technical outlook

Cable has extended a near-term bullish rebound from a demand zone priced in below 1.2640, climbing towards 1.2780 on Wednesday and leaving bids adrift sharply above the 200-hour Exponential Moving Average (EMA) at 1.2676.

Despite a bullish midweek bounce, a heavy supply zone is waiting for buyers, priced in above the 1.2800 handle. GBP/USD is trading north of the 200-day EMA at 1.2604.

GBP/USD hourly chart

GBP/USD daily chart

Pound Sterling FAQs

What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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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