Pound Sterling sets to test territory below 1.2800 ahead of key labor market report
- Pound Sterling has dropped at a snail’s pace ahead of the anticipated speech from Andrew Bailey.
- United Kingdom’s economic outlook is under threat as investors expect a higher interest rate peak.
- In addition to Bailey’s speech, UK’s labor market data on Tuesday will be keenly watched.
The Pound Sterling (GBP) has sensed selling pressure as market participants have turned cautious ahead of a speech from Bank of England (BoE) Governor Andrew Bailey on Monday at 15:00 GMT. Bias for the GBP/USD pair has softened as investors are anxious due to expectations of more interest rate hikes from the BoE.
The economic outlook of the United Kingdom is under threat as households are already facing the burden of elevated interest payment obligations and further policy tightening would make domestic activities more vulnerable. In addition to Bailey’s speech, Britain’s Employment data will also be on investors’ radar. Clarity about labor market conditions would also provide cues about interest rate guidance.
Daily Digest Market Movers: Pound Sterling remains on backfoot
- Pound Sterling has faced some pressure as investors have turned cautious ahead of a speech from Bank of England Governor Andrew Bailey.
- Investors will keenly watch cues about inflation and interest rate guidance and methods to which the central bank is looking beyond monetary tools.
- UK’s economy is facing the burden of high inflation as the housing sector fell in June at the sharpest pace in more than 14 years due to higher borrowing costs.
- Britain’s inflation has remained elevated due to higher food inflation and labor shortages.
- Labor shortages are expected to increase further as almost one in three female workers is considering early retirement because of health issues.
- Investors would get clarity about labor market conditions after the publication of the United Kingdom Employment data, which will be released on Tuesday at 6:00 GMT.
- Claimant Count Change is expected to show an increase of 20.5K in June vs. a decline of 13.6K reported last month.
- The Unemployment Rate is seen unchanged at 3.8% and Three-month Average Earnings Index is expected to increase to 6.8% against the former release of 6.5%.
- Higher wage pressure is going to make Andrew Bailey uncomfortable. The Bank of England Governor is putting blood and sweat to bring down inflation. This is a big challenge for UK PM Rishi Sunak who promised to halve price pressures by year-end.
- Last week, Andrew Bailey urged industry regulators to stop overcharging customers for fuel.
- Negative market sentiment is gaining strength as the US Dollar Index (DXY) has rebounded as hopes for more interest rate hikes from the Federal Reserve (Fed) have elevated.
- United States Nonfarm Payrolls (NFP) missed expectations but wage pressures remained resilient, which is sufficient to terrify Fed policymakers about inflation guidance.
- An interest rate hike announcement from Fed Chair Jerome Powell is well on track as higher Average Hourly Earnings could keep inflation extremely stubborn.
- Chicago Fed President Austan Goolsbee said two more interest rate hikes this year are well-favored.
- Going forward, investors will keep their entire focus on the US Consumer Price Index data, which is scheduled for Wednesday at 12:30 GMT.
Technical Analysis: Pound Sterling juggles around 1.2800
Pound Sterling has shown a corrective move on Monday after registering a fresh annual high at 1.2850. The Cable is approaching the upper portion of the Rising Channel chart pattern formed on a daily period. Short-to-long-term daily Exponential Moving Averages (EMAs) are sloping north, portraying sheer strength in the Pound Sterling.
Momentum oscillators are oscillating in the bullish range indicating strength in the upside bias.
A fresh upside would take place if the Pound Sterling will push the Cable above the annual high of 1.2850. The upside bias could fade if the asset drops below the crucial support of 1.2680.
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.