Pound Sterling recovers after post-NFP crash, pushing to new highs in mid-1.26s


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  • Pound Sterling vs US Dollar makes a recovery after declining following strong NFP data and reaches mid-1.2600s. 
  • 253K new hires were made in the US in April, a sharp rise from the 179K expected by economists.  
  • This leads the US Dollar to gain on higher inflation expectations and GBP/USD to decline after peaking for the year.
  • That said, Pound Sterling benefits from monetary policy divergence as elevated inflation suggests more aggressive hikes in the UK.

The Pound Sterling (GBP) recovers to the mid-1.26s against the US Dollar (USD) undoing all the damage done by the US Nonfarm Payrolls (NFP) release on Friday. The US Bureau of Labour Statistics reported that 253K new jobs had been added to the economy in April, against expectations of 179K. Average Hourly Earnings also rose, hitting 4.4% versus 4.2% forecast and 4.3% previous, suggesting persistent inflationary pressures.

Overall the data pointed to a tight labor market, backing up Federal Reserve Chairman Jerome Powells comments in the press conference after the Federal Open Market Committee (FOMC) meeting on Wednesday. It suggested inflationary pressures are enduring and may bring into doubt the markets broad view that the Federal Reserve (Fed) will not be raising rates any further. This led to US Dollar buying that weighed on the pair. 

Since then GBP/USD has recovered all the losses from the post-report downswing and climbed back up to new year-to-date highs, currently standing at 1.2652. A strong open for US equities, reflecting positive market sentiment and a risk-on environment have been posited as backing the rebound. The US Dollar is a safe-have currency so it generally suffers during period of positive market sentiment. 

The Pound Sterling, meanwhile, continues to be underpinned by UK monetary policy divergence with the US based on much higher inflation in the UK. The after effects of positive UK PMI data and early local election results further support the Pound Sterling. Meanwhile, regional banking fears remain a background thorn in the side of the US Dollar. 

From a broad technical perspective, GBP/USD continues to make new higher highs in a broadly bullish long-term uptrend. Given the old adage that “the trend is your friend” longs are, therefore, favored over shorts. 

GBP/USD market movers

  • An upbeat start to the US trading day, with stocks rising after Wall Street's open puts a safety-net under GBP/USD after the sell-off witnessed following the Nonfarm payrolls release, and leads to a bounce back up to new highs. 
  • The US Dollar gained after labor market data painted a positive picture of the jobs market, suggesting inflation will remain pressing. Nonfarm Payrolls increased by 253K, Average Hourly Earnings by 4.4%, and the Unemployment Rate by 3.4%. All three beat expectations. 
  • The data may put pressure on the Federal Reserve to potentially consider further tightening, despite its removal of wording from the accompanying statement at its last meeting, to the effect that further tightening would not be "appropriate". 
  • The Pound Sterling, meanwhile, has gained ballast from overall outflows from the US Dollar and the Euro, as the US Federal Reserve (Fed) and European Central Bank (ECB) are seen as having reached – or nearly having reached – peak interest rates in the current hiking cycle. 
  • With data continuing to show UK inflation above 10% for the seventh consecutive month and robust PMI data, as well as a recent uptick in house prices, those inflationary forces do not look like they are about to ebb away. 
  • This suggests the Bank of England (BoE), unlike its counterparts, is far from done with hiking interest rates, and may have to hike more than once to get inflation back under control. If so, this is a medium-term bullish factor for Pound Sterling. 
  • Next Thursday’s Bank of England (BoE) monetary policy meeting, therefore, could be a key driver as it will reveal the BoE’s intent regarding future policy trajectory. If it is particularly hawkish it will highlight this divergence with the Fed and result in increased flows to Pound Sterling. 
  • The so-far poor performance of the Conservative government in local elections is seen by some as a factor aiding the Pound Sterling as it could be indicative of a change of government at the next general election. The Pound Sterling declined to historic lows under the mismanagement of the economy by previous Prime Minister Lizz Truss and her Chancellor Kwazi Kwarteng, leading to a loss of faith in the Conservative party as a safe pair of hands when it comes to the economy.
  • UK S&P Global Services PMI out on Thursday showed a higher-than-expected result of 55.9 versus the 54.9 no-change forecast. Construction PMI out on Friday also beat expectations, coming out at 51.1 versus the 50.7 of the previous month. This suggests inflation will continue to rise in the UK and the Bank of England (BoE) will need to do substantially more to combat it.
  • The US Dollar is suffering after renewed banking crisis fears in the US on the back of the news two more regional banks, PacWest and Western Alliance are in trouble, with the latter announcing that it is exploring strategic options including a potential sale of all or part of its business. 

GBP/USD technical analysis: Pushing to new highs

GBP/USD whipsaws higher, pushing up to new highs in the mid 1.26s after a sharp decline following the release of positive Nonfarm Payrolls data on Friday. The pair remains in an  uptrend that began at the September 2022 lows, favoring Pound Sterling longs over shorts. 


GBP/USD: Daily Chart

With recent gains it is possible the break above the 1.2593 April 28 highs may be ‘decisive’ and therefore indicative of further gains to come. If Friday ends on a bullish close near its highs it will strongly suggest the pair has broken decisively higher and will extend its uptrend. If the day ends on a weak close, however, it will bring into doubt the validity of the earlier breakout and could signal further declines. 

As things stand, the bulls remain in the driving seat overall, and if price can recover and break decisively above the 1.2634 highs the trend would be expected to extend to the next target at 1.2680, followed by 1.2727 where the 100-week Simple Moving Average is situated. A strong close near the highs of the day – currently at 1.2652 on Friday – would also be a bullish sign and suggest more upside to come. 

Decisive breaks are usually characterized by moves that begin with a strong green daily bar that breaks above the key resistance high in question. Such breaks may be completed by a single long-green bar with price closing near the highs of the day, or alternatively, three consecutive green bars that break higher. Such insignia provide confirmation that the break is not a ‘false break’ or bull trap. 

The Relative Strength Index (RSI) remains below the overbought level and is creeping higher breaking the slight bearish divergence of recent days. This is a mildly supportive sign for the pair and may be indicative of further gains to come.

It would require a decisive break below the 1.2435 swing lows to signal the reversal of the dominant uptrend, thereby reversing the sequence of higher highs and higher lows. Prior to that, a decisive break below 1.2548 would be the first sign of cracks appearing. 

Pound Sterling FAQs

What is the Pound Sterling?

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 < href="https://fxssi.com/the-most-traded-currency-pairs">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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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.

 

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