Strong US labor market data spoils the Pound Sterling’s party

  • The Pound Sterling consolidated at three-month highs near 1.2800 against the US Dollar but failed to hold onto gains.
  • GBP/USD buyers gather pace for the next push higher as the Fed decision looms.
  • The Pound Sterling eyes a weekly close above 1.2800 to extend the bullish momentum.

The Pound Sterling (GBP) continued its battle with the 1.2800 level against the US Dollar (USD) this week, as the GBP/USD pair lost momentum after clinching a fresh three-month top near 1.2820.

Pound Sterling capitalized on renewed US Dollar supply

GBP/USD booked the fourth straight weekly gain, courtesy of the downbeat tone around the US Dollar, as markets brought bets for the US Federal Reserve (Fed) interest rates cut in September back on the table.

A slew of US economic data released during the week raised concerns about the US economic health, reviving expectations of the Fed policy pivot. Renewed dovish Fed expectations weighed heavily on the US Treasury bond yields and the US Dollar, allowing the GBP/USD pair to hold ground near multi-month highs near 1.2800.

Data released by the ISM showed on Monday that the Manufacturing PMI index dropped from 49.2 in April to 48.7 in May, missing the expected 49.6 print. The ISM Manufacturing Prices Paid eased to 57.0 in May vs. 60.9 previous and 60.0 expected. Job openings, a measure of labor demand, were down 296,000 to 8.059 million on the last day of April, the lowest level since February 2021, the Labor Department’s Bureau of Labor Statistics (BLS) said on Tuesday in its JOLTS survey.

On Wednesday, Automatic Data Processing (ADP) said that 152,000 jobs were created last month, sharply lower than the 173,000 jobs gain predicted. The previous figure was revised down to 188,000. Meanwhile, the US ISM Services PMI expanded firmly from 49.4 in April to 53.8 in May but the Price Paid sub-index dropped from 58.1 in the same period, compared to April’s 59.2. Thursday’s US Initial Jobless Claims also added to the economic gloom, rising to 229K in the week ended May 31, as against 221K booked previously.

Markets are currently pricing in about a 56% chance of a 25 basis points (bps) Fed rate cut in September, against a 46% probability of such a reduction seen a week ago, CME Group’s FedWatch tool showed.

Meanwhile, there was nothing of note from the UK side of the equation, as all the public appearances of the Bank of England (BoE) policymakers were canceled heading into the July 4  general elections in the UK. Further, the UK docket lacked any top-tier economic data releases, which have a significant impact on the value of the Pound Sterling. Therefore, no news turned out to be good news for the British Pound, helping GBP/USD to sustain at higher levels during the week.

On Friday, traders turned cautious and refrained from placing fresh bets on the GBP/USD pair, as they keenly await the US Nonfarm Payrolls (NFP) data to seal in a September Fed rate cut. The Bureau of Labor Statistics announced that NFP rose by 272,000 in May, beating the market expectation for an increase of 185,000 by a wide margin. Additionally, the annual wage inflation, as measured by the change in the Average Hourly Earnings, climbed to 4.1% from 4%. The USD gathered strength following the upbeat labor market data and caused GBP/USD to decline toward 1.2700 heading into the weekend.

Week ahead: US inflation and Fed verdict hold the key

Although traders gear up for the top-tier employment and the monthly Gross Domestic Product (GDP) report from the United Kingdom in the upcoming week, Wednesday’s US Consumer Price Index (CPI) data and Fed policy announcements will likely steal the show.

Also, of note will be the US Producer Price Index (PPI) data during the week, as the Fed policymakers will take up the rostrum from Thursday once the ‘blackout period’ ends.

Friday’s UK Consumer Inflation Expectations and the US Michigan Consumer Sentiment data will be closely scrutinized for fresh hints on the central banks’ policy outlooks.

GBP/USD: Technical Outlook

As observed on the daily chart, GBP/USD has been prodding the critical resistance at 1.2800 since May 28.

A weekly candlestick close above the level is needed for Pound Sterling buyers to embark on a sustained uptrend.

Acceptance above the latter would negate any near-term bearish bias, fueling a fresh advance toward the March 8 high of 1.2894. The next relevant resistance is seen at the 1.2950 psychological level.

The 14-day Relative Strength Index (RSI) has declined towards the 50 level, currently near 54, suggesting that the bullish potential for the Pound Sterling has partly waned.

If buyers fail to bid at higher levels, GBP/USD could turn south toward the initial support at 1.2712, where the 21-day Simple Moving Average (SMA) aligns.

Further south, the confluence zone of the rising trendline support and the 100-day SMA at around 1.2640 will challenge the bullish commitments.

The next downside targets are seen at the 50-day SMA of 1.2600, followed by the 200-day SMA at 1.2546.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.