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GBP/USD Forecast: Pound Sterling could correct lower on a positive NFP surprise

  • GBP/USD stays below 1.3200 after closing in positive territory on Thursday.
  • The US Bureau of Labor Statistics will publish August labor market data on Friday.
  • Investors expect an increase of 160,000 in Nonfarm Payrolls.

GBP/USD benefited from the selling pressure surrounding the US Dollar (USD) on Thursday and closed the second consecutive day in positive territory. After coming in within a touching distance of 1.3200, however, the pair lost its bullish momentum and started to retreat toward 1.3150.

British Pound PRICE This week

The table below shows the percentage change of British Pound (GBP) against listed major currencies this week. British Pound was the strongest against the Australian Dollar.

 USDEURGBPJPYCADAUDNZDCHF
USD -0.53%-0.29%-2.31%0.09%0.43%0.29%-0.86%
EUR0.53% 0.27%-1.81%0.60%0.98%0.81%-0.34%
GBP0.29%-0.27% -2.09%0.32%0.68%0.57%-0.63%
JPY2.31%1.81%2.09% 2.41%2.84%2.79%1.42%
CAD-0.09%-0.60%-0.32%-2.41% 0.38%0.19%-0.95%
AUD-0.43%-0.98%-0.68%-2.84%-0.38% -0.17%-1.31%
NZD-0.29%-0.81%-0.57%-2.79%-0.19%0.17% -1.14%
CHF0.86%0.34%0.63%-1.42%0.95%1.31%1.14% 

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).

On Thursday, the Automatic Data Processing (ADP) reported that payrolls in the private sector increased by 99,000 in August. This reading followed July's 111,000 increase and came in much below the market expectation of 145,000. With the initial reaction, the US Dollar (USD) came under selling pressure and allowed GBP/USD to push higher.

Later in the session, the US Bureau of Labor Statistics (BLS) will release labor market data for August. Investors expect Nonfarm Payrolls to rise 160,000. 

Growing signs of a cooldown in the US labor market have been feeding into expectations for a large Federal Reserve (Fed) rate reduction at the September policy meeting. According to the CME FedWatch Tool, markets currently see a 43% chance of a 50 bps rate cut.

A disappointing NFP reading, near 100,000, could put additional weight on the USD's shoulders heading into the weekend and fuel another leg higher in GBP/USD. On the other hand, a positive surprise, with a print close to 200,000, could have the opposite effect on the USD's valuation and make it difficult for GBP/USD to find a foothold in the American session.

GBP/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the 4-hour chart dropped below 60, reflecting a loss of bullish momentum. On the downside, immediate support is located at 1.3130, where the Fibonacci 23.6% retracement of the latest uptrend aligns. In case this support fails, 1.3100 (100-period Simple Moving Average (SMA), static level) could be seen as the next bearish target ahead of 1.3040 (Fibonacci 38.2% retracement level).

GBP/USD is likely to face first resistance at 1.3200 (static level). If the pair manages to clear this level, it could target 1.3260 (end-point of the uptrend) and 1.3300 (static level) next.

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.

Author

Eren Sengezer

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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