- GBP/USD clings to modest gains above 1.2800 following Thursday's rally.
- The near-term technical outlook points to overbought conditions.
- US economic docket will feature February jobs report on Friday.
GBP/USD rose more than 0.5% on Thursday and closed the fifth consecutive trading day in positive territory. The pair continued to edge higher early Friday and touched its highest level since August above 1.2800. The pair's near-term technical outlook points to overbought conditions as investors gear up for the US February jobs report.
GBP/USD extended its weekly rally on Thursday as risk flows continued to dominate the financial markets. Wall Street's main indexes registered strong gains for the second consecutive day and the US Dollar Index dropped to multi-week lows below 103.00.
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, 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.
The US Bureau of Labor Statistics will release labor market data for February. Nonfarm Payrolls (NFP) are forecast to rise by 200,000 following January's impressive 353,000 increase. In case NFP comes in stronger than forecast, investors could see this as a signal to take profit off the table, causing GBP/USD to push lower ahead of the weekend.
On the other hand, a disappointing NFP print could further weigh on the USD. Nevertheless, week-end flows could limit GBP/USD's upside, especially given the overbought conditions.
GBP/USD Technical Analysis
The Relative Strength Index (RSI) indicator on the 4-hour chart holds above 70 and GBP/USD trades well above the upper limit of the ascending regression channel coming from mid-February.
GBP/USD was last seen trading near 1.2830. In December, the pair staged a deep downward correction after meeting resistance at this level. In case GBP/USD manages to clear this hurdle this time around by confirming it as support, 1.2900 (psychological level, static level) could be seen as next resistance before 1.2940 (static level from August 2023).
On the downside, 1.2800 (psychological level, static level) could be seen as first support before 1.2780 (upper limit of the broken ascending regression channel). A 4-hour close below the latter could open the door for an extended slide toward 1.2750 (mid-point of the channel).
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