Pound Sterling drops as US Dollar revives after surprisingly upbeat NFP report

Pound Sterling slips vertically to near 1.2 as investors underpinned the risk-aversion theme.
UK economic activities were broadly vulnerable in September due to poor domestic and overseas demand.
BoE’s Broadbent remains confident about achieving price stability in two years.

The Pound Sterling (GBP) faces an intense sell-off the surprisingly upbeat United States Nonfarm Payrolls (NFP) report for September dampens investors' risk appetite and improves the US Dollar's appeal. The US employers hired 336K individuals, significantly higher than expectations of 170K, and revised August data of 227K. The Unemployment Rate remained unchanged at 3.8% but landed higher than expectations of 3.7%.

Earlier, the GBP/USD was struggling to climb above a three-day range high as investors seemed baffled about the United Kingdom’s inflation and economic outlook following September’s PMI data. UK firms were reluctant to utilize their full capacity and reduced hiring as higher interest rates by the Bank of England (BoE) have hit demand significantly.

Investors are not anticipating a quick revival in the UK’s overall demand as the BoE vowed to keep interest rates higher for a longer period to ensure price stability. BoE Deputy Governor Ben Broadbent sees inflation coming down to 2% in two years as restrictive monetary policy has dampened labor market and economic prospects.

Daily Digest Market Movers: Pound Sterling turns wild amid cautious market mood

Pound Sterling faces nominal selling pressure from a three-day high of 1.2196 as the market mood turns quiet ahead of crucial labor market data.
The GBP/USD pair struggles to extend its upside as investors remain worried about the UK’s economic outlook due to declining labor demand and weakening economic activities.
In September, the UK Manufacturing and Construction PMIs remained vulnerable as firms cut back on inventories and labor due to declining demand from domestic and overseas markets. The Services PMI improved significantly but remained below the 50.0 threshold.
The labor demand from UK firms has slowed due to higher wage growth. Firms restricted them from filling voluntary resignations as the cost of bringing fresh talent is extremely high.
Few businesses remained optimistic, as surveyed by S&P Global in the PMI data, as the Bank of England has paused policy tightening, but firms with higher dependency on debt are still pessimistic.
On Thursday, S&P Global reported the UK Construction PMI at 45.0 in September, much lower than expectations of 49.9 and the former release of 50.8. A figure below the 50.0 threshold is considered a contraction.
A decline in construction spending was widely anticipated as higher mortgage rates have forced households to postpone their demand for new houses. However, the impact of weak Construction PMI data is expected to remain limited as it is relatively a smaller part of the UK economy.
Meanwhile, a positive outlook on progress in declining inflation from BoE Governor Andrew Bailey and Deputy Governor Ben Broadbent has brought relief for investors.
This week, Andrew Bailey opposed changing the 2% inflation target and remained optimistic about bringing down inflation to 5% or below by year-end.
Ben Broadbent sees the achievement of price stability in two years. He further added that there are “clear signs” that higher interest rates have hit demand and elevated the Unemployment Rate.
Meanwhile, the US Dollar recovered strongly to near 107.00 after the release of the upbeat labor market data. This has established a hawkish undertone for the Federal Reserve's (Fed) November monetary policy.

Technical Analysis: Pound Sterling turns volatile near 1.2100

Pound Sterling drops sharply to near 1.2100 after a weak US labor market report. The recovery move in the GBP/USD pair came after momentum oscillators turned oversold on the daily time frame. The broader outlook of the GBP/USD pair is bearish as the 50 and 200-day Exponential Moving Averages (EMAs) have delivered a Death Cross near 1.2450. A confident downside move could drag the Cable toward the psychological support of 1.2000.

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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