Pound Sterling drops to near 1.3100 with focus on US Manufacturing PMI

The Pound Sterling falls to near 1.3100 against the US Dollar as the Greenback clings to gains ahead of the US ISM Manufacturing PMI for August.
US NFP data for August would be the major trigger this week.
Investors see the BoE keeping interest rates steady at 5% this month.

The Pound Sterling (GBP) exhibits a subdued performance slightly above the crucial support of 1.3100 against the US Dollar (USD) in Tuesday’s American session. The GBP/USD pair edges lower as the US Dollar grips gains near an almost two-week high, with investors’ attention turning to the United States (US) Nonfarm Payrolls (NFP) data for August, releasing this Friday.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, consolidates near 101.70.

Investors keenly await the labor market data as it is expected to drive market speculation for the magnitude of the Federal Reserve’s (Fed) interest rate cut this month. Currently, traders are split about whether the Fed will cut interest rates gradually by 25 basis points (bps) or aggressively by 50 bps.

The importance of the labor market data has increased significantly as comments from Fed Chair Jerome Powell at the Jackson Hole (JH) Symposium indicated that the central bank is more focused on preventing job demand, given that officials are confident about inflationary pressures remaining on track to sustainably return to bank’s target of 2%.

Investors will also get cues about the current labor market status from the US JOLTS Job Openings data for July and the ADP Employment Change data for August, which will be published on Wednesday and Thursday, respectively.

Meanwhile, the ISM Manufacturing Purchasing Managers Index (PMI) data came in lower-than-expected in August. Activities in the manufacturing sector contracted for the fifth straight month, with PMI coming in at 47.2, lower than estimates 47.5.

Daily digest market movers: Pound Sterling drops against US Dollar

The Pound Sterling performs weakly against its major peers, except Asia-Pacific currencies, during North American trading hours. The British currency remains on the back foot even though the Bank of England (BoE) is expected to follow a shallow interest rate cut cycle this year compared to its peer central bankers.
Traders see little chance that the BoE will cut interest rates in September but are confident about November, Reuters reported. Market speculation for September interest rate cuts is weak as inflationary pressures in the United Kingdom (UK) are expected to remain sticky due to strong economic prospects. Also, comments from BoE Governor Andrew Bailey at the JH Symposium indicated that the central bank will be careful not to cut interest rates too quickly or by too much.
The final estimate of S&P Global/CIPS Manufacturing PMI showed on Monday that activities in the manufacturing sector in the UK expanded to a 26-month high at 52.5 in August, driven by the continuation of a strong recovery in output, new orders, and labor demand.
“The UK manufacturing sector remained a positive contributor to broader economic growth in August. The headline PMI hit a 26-month high of 52.5, reflecting solid expansions in output and new orders and the strongest jobs growth for over two years. The upturn is broad-based across manufacturing, with the investment goods sector the stand-out performer”, Rob Dobson, Director at S&P Global Market Intelligence, said.
For fresh interest rate clues, investors await BoE policymaker Sarah Breeden’s speech, which is scheduled at 12:45 GMT. Breeden was among policymakers who voted for cutting interest rates in August by 25 basis points (bps) to 5%, along with Andrew Bailey, Swati Dhingra, Dave Ramsden, and Clare Lombardelli.

Technical Analysis: Pound Sterling struggles near 1.3100

The Pound Sterling declines to nearly 1.3100 against the US Dollar. The GBP/USD pair faces pressure after declining below the round-level support of 1.3200 last week. The Cable may likely find buying interest near the breakout region of a Channel chart formation on a daily timeframe.

The 14-day Relative Strength Index (RSI) declines to near 60.00 after exiting overbought conditions, signaling a lack of bullish momentum at the moment.

However, upward-sloping short-to-long-term Exponential Moving Averages (EMAs) suggest a strong bullish trend.

If bullish momentum resumes, the Cable is expected to rise towards the psychological resistance of 1.3500 and the February 4, 2022, high of 1.3640 after breaking above a fresh two-and-a-half-year high of 1.3266. On the downside, the psychological level of 1.3000 will be the crucial support for the Pound Sterling bulls.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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