Pound Sterling steadies as Fed Powell acknowledges risks to US labor market strength

Pound Sterling steadies as Fed Powell acknowledges risks to US labor market strength

  • The Pound Sterling exhibits strength against the US Dollar as Fed’s Powell sees softness in the US labor market strength.
  • The Fed chief did not guide any specific rate-cut path.
  • UK GDP for May and US Inflation for June have come under the spotlight.

The Pound Sterling (GBP) edges higher against the US Dollar (USD) in Wednesday’s early London session after a mild correction from almost a four-week high of 1.2850 this week. The broader appeal of the GBP/USD pair remains firm amid strong speculation that the Federal Reserve (Fed) will start reducing interest rates during the September meeting. 

The odds for the Fed pivoting to policy normalization remain firm even though Fed Chair Jerome Powell reiterated in his semi-annual Congressional testimony on Tuesday, refrained from providing any specific rate-cut path for this year. Powell argued in favor of maintaining interest rates at their current levels for long until they get evidence that inflation will return to the desired rate of 2%.

What was unexpected from Fed Powell’s commentary before Congress is his acknowledgement that the United States (US) economy is no longer overheated, with cooling job market conditions. Powell said that the labor market has moderated to where it was before pandemic-era.

Now that risks have become two-sided, a rate-cut move by the Fed in September appears to be a done deal. For more clarity, investors will focus on the US Consumer Price Index (CPI) report for June, which will be published on Thursday. The report is expected to show that the core inflation, which strips off volatile food and energy items, grew steadily by 0.2% and 3.4% on a monthly and annual basis, respectively. Annual headline inflation is estimated to have decelerated to 3.1% from May’s reading of 3.3%, while the monthly figure is expected to have barely grown after remaining unchanged. 

A scenario in which price pressures remain sticky or hot would ease expectations for rate cuts in September. On the contrary, soft numbers will boost them.

Daily Digest Market Movers: Pound Sterling remains firm with UK GDP in focus

  • The Pound Sterling performs strongly against its major peers due to multiple tailwinds. The British currency strengthens as the outright victory of the United Kingdom (UK) Keir Starmer-led Labour Party in parliamentary elections against Rishi Sunak-led Conservative Party has brought political stability to the economy. The uncertainty over the Bank of England (BoE) rate-cut path has deepened after hawkish guidance from BoE policymaker Jonathan Haskel.
  • On Monday, Jonathan Haskel, who has been amongst major hawks, said no to a rate cut in August as inflation in the labor market is still higher due to strong wage growth. Haskel said, “I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably,” Reuters reported.
  • On the contrary, financial markets currently expect that the BoE will begin cutting its key rates from the August meeting. The expectations for BoE rate cuts in August have been prompted by the return of the annual headline inflation to bank’s target of 2%.
  • Meanwhile, investors shift focus to the monthly Gross Domestic Product (GDP) and factory data for May, which will be published on Thursday. Economists expect that the economy expanded by 0.2% after remaining unchanged in April. Industrial and Manufacturing Production are expected to have grown on a monthly and annual basis after declining in April. 

Technical Analysis: Pound Sterling aims to hold 1.2800

The Pound Sterling aims to hold the key figure of 1.2800 against the US Dollar. The GBP/USD pair gathers strength for a decisive breakout of the Inverted Head and Shoulder (H&S) chart formation on a daily timeframe whose neckline is plotted near 1.2850. A breakout of the H&S formation results in a bullish reversal.

Advancing 20-day Exponential Moving Average (EMA) near 1.2730, suggests that the near-term trend is bullish.

The 14-day Relative Strength Index (RSI) climbs into the bullish range of 60.00-80.00. A sustained move above the same will keep the momentum towards the upside.

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.

 

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