- The Pound Sterling drops from 1.2680 as deepening Middle East tensions hurt risk-sensitive currencies.
- A sharp dip in UK inflation expectations improves BoE’s early rate cut hopes, weighing on the Sterling.
- The US Dollar bounces back on strong US Nonfarm Payrolls data
The Pound Sterling (GBP) falls sharply to 1.2600 in Friday’s early American session. The GBP/USD pair weakens as upbeat United States Nonfarm Payrolls (NFP) data for March has boosted demand for the US Dollar.
The labor market report showed that NFP for February were higher at 303K, against expectations of 200K and the prior reading of 270K, downwardly revised from 275K. The Unemployment Rate drops to 3.8% from expectations and the prior reading of 3.9%. Annual Hourly Earnings grew by 0.3%, as expected on a month-on-month basis. The annual wage growth slowed to 4.1%, as expected from the former reading of 4.3%.
Strong labor demand that leads to higher wage growth, which spurts inflation, would allow the Federal Reserve (Fed) to delay rate-cut plans. On Thursday, Minneapolis Fed Bank President Neel Kashkari warned rate cuts won’t be required this year if inflation stalls. Kashkari also said he forecasted two rate cuts for 2024 in the latest dot plot.
Meanwhile, easing inflation expectations in the United Kingdom has also weighed on the Pound Sterling. The latest Bank of England (BoE) Decision Maker Panel (DMP) survey for February showed that most firms see selling prices and wage inflation cooling down over the next year. Selling price expectations decelerated to 4.1% from 4.3%, the lowest reading in over two years. Wage growth expectations softened to 4.9% on a three-month moving average basis from 5.2% in February.
Easing inflation expectations are expected to boost BoE rate cut expectations for the June meeting. Deepening hopes for BoE early rate cuts negatively influence the Pound Sterling.
Daily digest market movers: Pound Sterling drops while US Dollar advances
- The Pound Sterling extends its correction to 1.2600 on cautious market sentiment. Deepening Middle East tensions and easing Federal Reserve rate cut expectations for June after upbeat the United States NFP report for March have promoted recovery in the US Dollar.
- The US Dollar Index (DXY) bounces back from a two-week low of 103.90. The killing of seven members of Iran’s Islamic Revolutionary Guard Corps (IRGC) by air strikes from Israeli forces in Damascus has deepened fears of Iran’s direct involvement in the Israel-Palestine war.
- The Pound Sterling falls as investors hope the Bank of England will pivot to rate cuts in June due to easing price pressures. Expectations for the BoE to reduce rates from June were reinforced after BoE Governor Andrew Baily said that market expectations for two or three rate cuts this year are reasonable.
- Meanwhile, the United Kingdom’s soft Services PMI data for March, released on Thursday, has impacted the economic outlook. The Services PMI fell to 53.1, missing expectations and the prior reading of 53.4. Tim Moore, Economics Director at S&P Global Market Intelligence, said: "The recovery in service sector output lost a little bit of momentum during March, and more so than suggested by the flash PMI results, but the overall picture remains reasonably positive.”
Technical Analysis: Pound Sterling faces sell-off near 1.2680
The Pound Sterling falls further after retreating from its two-week high of 1.2680. The GBP/USD pair fails to sustain above the 20-day and 50-day Exponential Moving Averages (EMAs), which trade around 1.2660. Meanwhile, the 200-day EMA at 1.2566 continues to provide support.
On a broader time frame, the horizontal support from December 8 low at 1.2500 would provide further cushion to the Pound Sterling. Meanwhile, the upside is expected to remain limited near an eight-month high of around 1.2900.
The 14-period Relative Strength Index (RSI) rebounds above 40.00 after slipping below it. This should not be considered as a “bullish reversal” until it decisively breaks above 60.00.
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.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD treads water just above 1.0400 post-US data
Another sign of the good health of the US economy came in response to firm flash US Manufacturing and Services PMIs, which in turn reinforced further the already strong performance of the US Dollar, relegating EUR/USD to the 1.0400 neighbourhood on Friday.
GBP/USD remains depressed near 1.2520 on stronger Dollar
Poor results from the UK docket kept the British pound on the back foot on Thursday, hovering around the low-1.2500s in a context of generalized weakness in the risk-linked galaxy vs. another outstanding day in the Greenback.
Gold keeps the bid bias unchanged near $2,700
Persistent safe haven demand continues to prop up the march north in Gold prices so far on Friday, hitting new two-week tops past the key $2,700 mark per troy ounce despite extra strength in the Greenback and mixed US yields.
Geopolitics back on the radar
Rising tensions between Russia and Ukraine caused renewed unease in the markets this week. Putin signed an amendment to Russian nuclear doctrine, which allows Russia to use nuclear weapons for retaliating against strikes carried out with conventional weapons.
Eurozone PMI sounds the alarm about growth once more
The composite PMI dropped from 50 to 48.1, once more stressing growth concerns for the eurozone. Hard data has actually come in better than expected recently – so ahead of the December meeting, the ECB has to figure out whether this is the PMI crying wolf or whether it should take this signal seriously. We think it’s the latter.
Best Forex Brokers with Low Spreads
VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.