- The Pound Sterling falls slightly against its major peers after the release of the UK labor market data for three months ending January.
- UK Average Earnings Excluding Bonuses rose steadily by 5.9%, as expected.
- The BoE is widely anticipated to keep interest rates steady at 4.5% on Thursday.
The Pound Sterling (GBP) faces selling pressure against its major peers, except antipodeans, on Thursday after the release of the United Kingdom (UK) labor market data for three months ending January. The Office for National Statistics (ONS) reported that the ILO Unemployment Rate came in at 4.4%, which aligns with expectations and the prior reading.
The UK economy added 144K fresh workers, significantly higher than 107K additions in the three months ending December.
Average Earnings Excluding bonuses, a key measure of wage growth that has been a major driver of high inflation in the services sector, rose in line with estimates and the former release of 5.9%.
Technically, upbeat employment and steady wage growth data are a favorable scenario for the British currency. However, market participants see wage growth momentum softening and employment growth slowing in the near term as business owners are planning to freeze hiring plans amid dissatisfaction over the UK government’s decision to increase employers’ contributions to social security schemes.
UK Chancellor of the Exchequer Rachel Reeves announced an increase in employers’ contribution to National Insurance (NI) from 13.8% to 15% in the Autumn Budget, which will be executed from April.
Such a scenario would be unfavorable for the Pound Sterling as easing labor market conditions could force Bank of England (BoE) officials to ditch their ‘gradual and cautious’ monetary easing approach guided in the February policy meeting.
Meanwhile, investors await the Bank of England’s (BoE) interest rate decision, which will be announced at 12:00 GMT. The BoE is widely anticipated to keep interest rates unchanged at 4.5%, with a 7-2 vote split. In the last policy meeting in February, the BoE reduced borrowing rates by 25 basis points (bps).
BoE Monetary Policy Committee (MPC) members Catherine Mann and Swati Dhingra are expected to support an interest rate cut. In the February policy meeting, both officials voted for a larger-than-usual interest rate reduction of 50 bps, while others favored a usual cut of 25 bps.
Daily digest market movers: Pound Sterling edges lower against US Dollar after Fed’s policy decision
- The Pound Sterling drops to near 1.2970 against the US Dollar (USD) in European trading hours on Thursday. Still, the GBP/USD pair is close to its five-month high of 1.3014 reached earlier in the day. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, turns sideways around 103.50 after the Federal Reserve’s (Fed) monetary policy decision on Wednesday.
- As expected, the Fed kept interest rates steady in the range of 4.25%-4.50% for the second time in a row and stuck with its two interest rate cuts projection for the year, as anticipated in the December meeting. The central bank guided that the net effect of implementation of significant policy changes by the new administration is what matters for the economy and monetary policy.
- Fed Chair Jerome Powell said in the press conference that the tariff policy by United States (US) President Donald Trump has resulted in a “unusually elevated” uncertainty over the US economic outlook, which tends to bring “growth down and inflation up”. This led them to revise their core Personal Consumption Expenditures (PCE) inflation forecast for this year to 2.8%, up from the 2.5% projected in the December meeting. The Fed also updated their Gross Domestic Product (GDP) growth forecast for this year to 1.7%, down from their prior forecast of 2.1%.
- Meanwhile, Donald Trump said that the Fed should have cut interest rates as the impact of tariffs has started to blend into the economy. “The Fed would be much better off cutting rates as US tariffs start to transition (ease!) their way into the economy. Do the right thing,” Trump said in a post on Truth Social after the Fed’s policy decision.
- In Thursday’s session, investors will focus on the US Initial Jobless Claims data for the week ending March 15, which will be published at 12:30 GMT. The Department of Labor is expected to report that individuals claiming jobless benefits for the first time increased to 224K from the former release of 220K.
Technical Analysis: Pound Sterling sees more upside above 1.3000
The Pound Sterling struggles to extend its two-month rally above the key level of 1.3000 against the US Dollar on Thursday. GBP/USD bulls take a breather as the 14-day Relative Strength Index (RSI) reached overbought levels above 70.00. However, this doesn’t reflect that the bullish trend is over. The upside trend could resume once the momentum oscillator cools down to near 60.00.
Advancing 20-day and 50-day Exponential Moving Averages (EMAs) near 1.2850 and 1.2705, respectively, suggest that the overall trend is bullish.
Looking down, the 50% Fibo retracement at 1.2770 and the 38.2% Fibo retracement at 1.2615 will act as key support zones for the pair. On the upside, the October 15 high of 1.3100 will act as a key resistance zone.
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.