- Pound Sterling rose close to 1.2300 despite signs of a loosening UK labor market.
- UK employers shed jobs for straight three months, but earnings rose by more than expected.
- Investors await US,UK inflation data and commentaries from BoE policymakers.
The Pound Sterling (GBP) extended its upside on Tuesday after mixed UK labor market data, which pointed to wages rising faster than expected but also to lower employment levels. UK employers’ shed jobs in three months to September, posting a third straight decline in employment as firms reduce costs amid the decline in new business. The Unemployment Rate remained unchanged at 4.2%, while wage growth outperformed expectations.
The rally in the GBP/USD pair stretches despite weak UK labor market data, which indicates that soft employment conditions were already discounted by the market participants. Going forward, remarks from a few BoE policymakers are expected, followed by inflation data for October to be released on Wednesday. Inflation data is expected to provide fresh cues about the likely action by the BoE in its last monetary policy meeting of 2023.
Daily Digest Market Movers: Pound Sterling capitalizes on gradual fall in US Dollar
- Pound Sterling jumps to near the crucial resistance of 1.2300 despite loosening labor market conditions in the UK economy.
- Employment fell by 207K in the three months to September, a bigger decline than the 198K expected and the former decrease of 82K. The UK workforce has witnessed drawdown for the third time in a row.
- UK firms cut significantly on workforce as new demand has declined due to lower spending by households. Demand from overseas markets has also dropped due to geopolitical tensions.
- In the same period, the Unemployment Rate remained steady at 4.2%. Economists had projected the jobless rate rising to 4.3%.
- Individuals claiming jobless benefits for the first time rose to 17.8K in October, exceeding the 15K expected and 9K reading from September.
- Average Earnings excluding bonuses rose by 7.7% in the quarter-to-September period as expected, easing slightly from the former reading of 7.9%. However, wage growth including bonuses grew at a stronger pace of 7.9% against expectations of 7.4%. In the former period, earnings expanded by 8.2%.
- Strong wage growth in the UK economy has been a major contributor to stubborn price pressures. Stubborn UK wage growth is likely to lift consumer inflation expectations.
- In spite of persistent wage growth, a majority of Bank of England (BoE) policymakers are expected to support keeping interest rates unchanged or discuss early rate cuts due to weakening labor demand.
- The decrease in employment signals a slowdown in the UK economy.
- After UK labor market data, investors will shift focus on the commentaries from BoE policymakers: Swati Dhingra and Huw Pill, who are expected to advocate for a relief in tight monetary policy narrative to ease fears of a potential recession.
- Going forward, UK inflation data for October will be keenly watched on Wednesday. The annual headline and core inflation are expected to soften significantly to 4.8% and 5.8%, respectively.
- Soft consensus for UK inflation suggests that UK Prime Minister Rishi Sunak could fulfill his promise of halving inflation to 5.4% by the year-end. Sunak promised halving inflation in January, when price growth was near 10.7%.
- Meanwhile, the US Dollar Index (DXY) remains subdued ahead of the US inflation data for October.
- Investors see core inflation expanding at a steady pace of 0.3% on month and 4.1% on year, which could heat up discussions about further policy-tightening by the Federal Reserve (Fed).
- Failing to advance towards the 2% inflation target could lean Fed Chair Jerome Powell and colleagues toward tightening interest rates further.
Technical Analysis: Pound Sterling recovers to near 1.2300
Pound Sterling climbed to near 1.2300 after investors ignored weaker-than-anticipated UK labor market data. The GBP/USD pair recovered after testing support region near 1.200, where a breakout of the symmetrical triangle chart pattern took place.
The 20-day Exponential Moving Average (EMA), which trades around 1.2230, offered support to the Pound Sterling bulls, which later pushed it to near the 50-day EMA. The broader appeal for the Cable is still bearish as the 200-day EMA is sloping south.
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.