- The Pound Sterling drops from 1.2680 as deepening Middle East tensions hurt risk-sensitive currencies.
- A sharp dip in UK inflation expectations improves BoE’s early rate cut hopes, weighing on the Sterling.
- The US Dollar bounces back on strong US Nonfarm Payrolls data
The Pound Sterling (GBP) falls sharply to 1.2600 in Friday’s early American session. The GBP/USD pair weakens as upbeat United States Nonfarm Payrolls (NFP) data for March has boosted demand for the US Dollar.
The labor market report showed that NFP for February were higher at 303K, against expectations of 200K and the prior reading of 270K, downwardly revised from 275K. The Unemployment Rate drops to 3.8% from expectations and the prior reading of 3.9%. Annual Hourly Earnings grew by 0.3%, as expected on a month-on-month basis. The annual wage growth slowed to 4.1%, as expected from the former reading of 4.3%.
Strong labor demand that leads to higher wage growth, which spurts inflation, would allow the Federal Reserve (Fed) to delay rate-cut plans. On Thursday, Minneapolis Fed Bank President Neel Kashkari warned rate cuts won’t be required this year if inflation stalls. Kashkari also said he forecasted two rate cuts for 2024 in the latest dot plot.
Meanwhile, easing inflation expectations in the United Kingdom has also weighed on the Pound Sterling. The latest Bank of England (BoE) Decision Maker Panel (DMP) survey for February showed that most firms see selling prices and wage inflation cooling down over the next year. Selling price expectations decelerated to 4.1% from 4.3%, the lowest reading in over two years. Wage growth expectations softened to 4.9% on a three-month moving average basis from 5.2% in February.
Easing inflation expectations are expected to boost BoE rate cut expectations for the June meeting. Deepening hopes for BoE early rate cuts negatively influence the Pound Sterling.
Daily digest market movers: Pound Sterling dips while US Dollar advances
- The Pound Sterling extends its correction to 1.2600 on cautious market sentiment. Deepening Middle East tensions and easing Federal Reserve rate cut expectations for June after upbeat the United States NFP report for March have promoted recovery in the US Dollar.
- The US Dollar Index (DXY) bounces back from a two-week low of 103.90. The killing of seven members of Iran’s Islamic Revolutionary Guard Corps (IRGC) by air strikes from Israeli forces in Damascus has deepened fears of Iran’s direct involvement in the Israel-Palestine war.
- The Pound Sterling falls as investors hope the Bank of England will pivot to rate cuts in June due to easing price pressures. Expectations for the BoE to reduce rates from June were reinforced after BoE Governor Andrew Baily said that market expectations for two or three rate cuts this year are reasonable.
- Meanwhile, the United Kingdom’s soft Services PMI data for March, released on Thursday, has impacted the economic outlook. The Services PMI fell to 53.1, missing expectations and the prior reading of 53.4. Tim Moore, Economics Director at S&P Global Market Intelligence, said: “The recovery in service sector output lost a little bit of momentum during March, and more so than suggested by the flash PMI results, but the overall picture remains reasonably positive.”
Technical Analysis: Pound Sterling faces pressure near 1.2680
The Pound Sterling falls further after retreating from its two-week high of 1.2680. The GBP/USD pair fails to sustain above the 20-day and 50-day Exponential Moving Averages (EMAs), which trade around 1.2660. Meanwhile, the 200-day EMA at 1.2566 continues to provide support.
On a broader time frame, the horizontal support from December 8 low at 1.2500 would provide further cushion to the Pound Sterling. Meanwhile, the upside is expected to remain limited near an eight-month high of around 1.2900.
The 14-period Relative Strength Index (RSI) rebounds above 40.00 after slipping below it. This should not be considered as a “bullish reversal” until it decisively breaks above 60.00.
Nonfarm Payrolls FAQs
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.
