Pound Sterling gains on upbeat UK employment data
- The Pound Sterling moves higher against its peers on strong UK employment data for the three months ending June.
- Growth in UK Average Earnings showed signs of slowing down.
- Investors await US inflation and the UK Q2 GDP data as the next catalysts.
The Pound Sterling (GBP) attracts significant bids against its major peers on Tuesday after the release of the upbeat United Kingdom (UK) labor market data for the three-months ending June.
The Office for National Statistics (ONS) reported that the economy created fresh 239K jobs in the second quarter of the year, well above the 134K workers hired in the three months ending May. This is a significant recovery from earlier indicatores, which showed that firms became reluctant to increase their workforce due to the increase in employers’ contributions to social security schemes to 15%.
The ILO Unemployment Rate came in steady at 4.7%, as expected. Claimant Count Change for July declined by 6.2K, while it was expected to increase to 20.8K.
Meanwhile, Average Earnings data, a key measure of wage growth, showed signs of slightly moderating growth. Excluding bonuses, earnings rose at a steady rate of 5% on year, as expected. Average Earnings Including Bonuses grew at a slower pace of 4.6%, compared to estimates of 4.7% and the prior reading of 5%.
Upbeat job growth data is expected to allow Bank of England (BoE) officials to maintain their “gradual and careful” monetary expansion stance. Last week, the BoE cut interest rates by 25 basis points (bps) to 4%, with a slim majority.
This week, investors will also focus on the UK Preliminary Q2 Gross Domestic Product (GDP) and factory data for June, which is scheduled to be released on Thursday.
Daily digest market movers: Pound Sterling flattens against US Dollar ahead of US CPI data
- The Pound Sterling recovers early losses and flattens around 1.3440 against the US Dollar (USD) during the European trading session on Tuesday. Investors brace for significant action in the US Dollar once the United States (US) Consumer Price Index (CPI) data for July is published at 12:30 GMT. Investors will closely monitor the US inflation data to gauge whether the impact of the tariff-driven inflation is one-time or persistent.
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades stably near the two-day high around 98.50.
- Economists expect US headline inflation to have risen to 2.8% in July from 2.7% in June. The core CPI inflation, which excludes the volatile food and energy categories, is forecast to rise to 3% year-over-year (YoY) from 2.9% the previous month. Over the month, the CPI and the core CPI are seen advancing by 0.2% and 0.3%, respectively.
- Signs of price pressures accelerating might force traders to reassess bets supporting interest rate cuts by the Federal Reserve (Fed) in the September policy meeting. On the contrary, cooling prices would boost these odds.
- Lately, the comments from Fed officials have signaled that they are more concerned about deteriorating job demand than fears of inflation.
- Over the weekend, Fed Governor Michelle Bowman supported a gradual move from monetary policy restrictiveness to a neutral setting amid cooling labor market conditions. Bowman added that July’s employment figures have strengthened her confidence in her forecast that there will be three interest rate cuts this year.
- On thetrade front, the US and China have agreed to extending their tariff truce for another 90 days. The Chinese Commerce Ministry stated earlier in the day that it is working towards reducing non-tariff barriers to American companies, and will suspend adding some US firms to its unreliable entity and export control lists for 90 days.
Technical Analysis: Pound Sterling holds 20-day EMA
The Pound Sterling trades flat around 1.3440 against the US Dollar on Tuesday. The GBP/USD pair holds the 20-day Exponential Moving Average (EMA), which trades around 1.3408, suggesting that the near-term trend favors the upside.
The 14-day Relative Strength Index (RSI) bounces back above 50.00 after oscillating inside the 20.00-40.00 range in the past few trading sessions, suggesting an attempt for bullish reversal.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the July 23 high near 1.3585 will act as a key barrier.
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, also known as ‘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.