The Pound Sterling (GBP) sold off after failing to test the crucial resistance of 1.2800 as higher interest rates by the Bank of England (BoE) started deepening recession fears. The GBP/USD pair drops significantly as higher interest rates are threatening the United Kingdom’s economic outlook. The UK’s strong labor market is loosening its resilience as firms slow down their hiring process amid bleak economic prospects.
An aggressive rate-tightening cycle by the BoE has started affecting the United Kingdom’s housing sector and strong labor market but is building a base for bringing inflation back to 2%. Andrew Bailey seems confident that inflation will soften to 5% by October as the central bank will keep interest rates “sufficiently restrictive for a sufficient period”.
Pound Sterling faces strong selling pressure in an attempt to test the crucial resistance of 1.2800. The Cable senses selling interest after testing the breakdown region of the Rising Channel chart pattern. The asset is trading below the 20 and 50-day Exponential Moving Averages (EMAs), portraying a bearish trend.
Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.
The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation.
A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work.
The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.
Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower.
NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.
Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa.
Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold.
Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.
Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components.
At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary.
The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.
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