Pound Sterling recovery falters on weak UK PMI, US Dollar recovers


  • Pound Sterling extends downside on vulnerable UK PMI data.
  • The UK ONS reported that the labor force shed jobs for the third time in a row.
  • The BoE is expected to leave interest rates unchanged next week.

The Pound Sterling (GBP) faces some sell-off in an attempt to capture the crucial resistance of 1.2300. It seems merely a correction as more upside seems possible amid improved market sentiment and better-than-anticipated employment data. The UK Office for National Statistics (ONS) reported that the labor market shed jobs for the third time in a row in the quarter to August, but the number of jobs lost was lower than expected. Moreover, the Unemployment Rate fell and remained below the expectations, indicating stable labor market conditions.

Labor demand in the UK has slowed significantly due to the deteriorating demand environment amid higher borrowing costs by the Bank of England (BoE), which has been raising interest rates sharply in an attempt to bring down consumer inflation to 2%. Investors shift their focus towards the next BoE’s interest rate decision, which will be announced on November 2. The  BoE is expected to keep interest rates steady at 5.25% as weakening signs for the economy mount.

Daily Digest Market Movers: Pound Sterling weakens as US Dollar, yields revive

  • Pound Sterling faced an intense sell-off as the labor market squeezed for the third month in a row and business activity remained in the contracting phase.
  • The UK ONS reported that employers shed 82K jobs in the June-August period, which was significantly lower than expectations of 198K lay-offs. In the three months to July period, employment declined by 207K.
  • Consistently declining laborforce indicates that firms have cut on workforce due to poor demand.
  • The Unemployment Rate dropped to 4.2% in the three months to August, against expectations and the former reading of 4.3%.
  • In September, the Claimant Count Change rose 20.4K while economists projected a marginal increase of 2.3K. In August, individuals claiming jobless benefits were 0.9K.
  • The release of the mix of US S&P Global preliminary PMI data for October has also built some pressure on the Pound Sterling. The Manufacturing PMI at 45.2, outperformed expectations and the former reading of 45.0 and 44.3 respectively. The Services PMI at 49.2, remained below the expectations of 49.5, and September's release of 49.3.
  • The labor market data was expected last week but the Labour Force Survey (LFS) said that responses were inconsistent in comparison with tax data and surveys of employers.
  • Investors should be aware of the fact that the Employment Change and the Unemployment data are experimental adjusted estimates as the usual data collected by the LFS was hampered due to low response rates.
  • According to a poll conducted by Reuters, the Bank of England is expected to hold interest rates unchanged at 5.25% on November 2.
  • The absence of supportive economic indicators and the confidence of BoE Governor Andrew Bailey that inflation will have a marked fall next month could allow policymakers to leave interest rates unchanged.
  • The UK Manufacturing and Services PMI is below the 50.0 threshold, labor demand has slowed and Retail Sales contracted, signaling weak economic activity and likely denting consumer inflation expectations.
  • The broader market mood remains downbeat amid Middle East tensions. The Israeli military troops are planning for the ground assault in Gaza to dismantle Hamas. Gaza health authorities reported 5,000 deaths and more than 15,000 civilians wounded.
  • The GBP/USD pair recovered strongly on Monday after the US Dollar Index (DXY) faced a sell-off. The USD Index dropped sharply to near 105.50 as long-term US Bond yields edged lower from a multi-year high above 5%.
  • The 10-year US Treasury yields drop ahead of upcoming key US economic data to be released later this week. Investors keenly await Q3 Gross Domestic Product (GDP), Federal Reserve's (Fed) preferred inflation gauge, and Durable Goods Orders data.
  • Investors seem worried about deteriorating financial conditions due to higher yields and Middle East tensions as they could trigger a slowdown in the US economy.

Technical Analysis: Pound Sterling skids below 1.2200

Pound Sterling dropped after printing a fresh weekly high around 1.2280 amid a risk-on mood. The Cable attracted significant bids after a breakout of the consolidation formed in a range of 1.2100-1.2230. The GBP/USD pair climbs above the 20-day Exponential Moving Average (EMA), which indicates that the short-term trend has turned bullish. While the broader GBP/USD outlook is still bearish due to a death cross signal by the 50-day and 200-day EMAs.

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).

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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