The Pound Sterling (GBP) exhibits a subdued performance slightly above the crucial support of 1.3100 against the US Dollar (USD) in Tuesday’s London session. The GBP/USD pair edges lower as the US Dollar grips gains near an almost two-week high, with investors’ attention turning to the United States (US) Nonfarm Payrolls (NFP) data for August, releasing this Friday.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, consolidates near 101.70.
Investors keenly await the labor market data as it is expected to drive market speculation for the magnitude of the Federal Reserve’s (Fed) interest rate cut this month. Currently, traders are split about whether the Fed will cut interest rates gradually by 25 basis points (bps) or aggressively by 50 bps.
The importance of the labor market data has increased significantly as comments from Fed Chair Jerome Powell at the Jackson Hole (JH) Symposium indicated that the central bank is more focused on preventing job demand, given that officials are confident about inflationary pressures remaining on track to sustainably return to bank’s target of 2%.
Investors will also get cues about the current labor market status from the US JOLTS Job Openings data for July and the ADP Employment Change data for August, which will be published on Wednesday and Thursday, respectively.
In Tuesday’s session, the US Dollar will be influenced by the S&P Global (final estimate) and ISM Manufacturing Purchasing Managers Index (PMI) data for August, which will be published in the North American session. Economists expect that activities in the manufacturing sector contracted at a slower pace, with the official PMI from the ISM coming in at 47.5 from July’s reading of 46.8.
The Pound Sterling declines to nearly 1.3100 against the US Dollar. The GBP/USD pair faces pressure after declining below the round-level support of 1.3200 last week. The Cable may likely find buying interest near the breakout region of a Channel chart formation on a daily timeframe.
The 14-day Relative Strength Index (RSI) declines to near 60.00 after exiting overbought conditions, signaling a lack of bullish momentum at the moment.
However, upward-sloping short-to-long-term Exponential Moving Averages (EMAs) suggest a strong bullish trend.
If bullish momentum resumes, the Cable is expected to rise towards the psychological resistance of 1.3500 and the February 4, 2022, high of 1.3640 after breaking above a fresh two-and-a-half-year high of 1.3266. On the downside, the psychological level of 1.3000 will be the crucial support for the Pound Sterling bulls.
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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