Pound Sterling soars as investors ignore upbeat US NFP data

The Pound Sterling recovers sharply after the release of the upbeat US Nonfarm Payrolls data.
While the UK manufacturing sector continues to face pressure, the services sector outperformed in December, according to PMI figures.
A mild recession in the UK economy is highly likely.

Sagar Dua FXStreet

The Pound Sterling (GBP) advances strongly against the US Dollar as markets’ risk appetite has improved despite the release of the upbeat US economic data. The GBP/USD pair has strengthened despite all components of the United States Nonfarm Payrolls data for December has outperformed expectations. It seems that a robust labor demand in the US economy was already discounted by the market participants.

While Pound Sterling could lose its firm-footing as investors see tough decisions ahead for Bank of England (BoE) policymakers, who are stuck between deepening recession risks in the UK economy and high underlying inflation.

The likelihood of a technical recession in the UK economy is high as it contracted in the third quarter and a stagnant performance is anticipated for the final quarter. Also, recent PMI data signaled that the manufacturing sector continues to face pain due to high interest rates. The outlook for the GBP/USD pair has dampened as US employment indicators may reshape guidance on interest rates by the Federal Reserve (Fed).

Daily Digest Market Movers: Pound Sterling strengthens while US Dollar falls

The Pound Sterling delivers a strong recovery despite the United States official Employment data for December turns out stronger-than-projected.
US employers added 216K workers against the 199K jobs created in November while investors saw moderate job gains in December.
The Unemployment Rate remains unchanged at 3.7% against expectations of a slight rise to 3.8%.
Average Hourly Earnings grew at a steady apce of 0.4%. The annual wage growth was 4.1% against prior rise of 4.0%. Investors forecasted labor cost data softeneing to 3.9%.
Bets in favour of a rate cut by the Federal Reserve in March have de-escalated sharply.
The US Dollar Index (DXY) has fallen sharply ater registering a fresh three-week high at 103.00.
Meanwhile, the Pound Sterling remains on the back foot as investors anticipate a mild recession in the United Kingdom. The country’s economy shrank by 0.1% in the third quarter of 2023.
Bank of England policymakers remain on a balancing act as an early rate cut decision to skirt a recession could fuel inflationary pressures.
While the UK’s manufacturing sector continues to remain in a contraction phase due to tough conditions in the domestic and overseas markets, the Services PMI – which gauges activity in the services sector – expanded at the fastest pace since June.
S&P Global reported on Thursday that the Services PMI rose to 53.4 in December against expectations of 52.7 and the former reading of 50.9.
A significant rise in client demand on hopes of lower borrowing costs and economic recovery in 2024 accelerated growth in service activities, S&P Global said.

Technical Analysis: Pound Sterling recaptures 1.2700

The Pound Sterling has rebounded to near the round-level resistance of 1.2720 as the risk-appetite of the amrket participants has improved. The GBP/USD pair recovers after discovering strong buying interest near 1.2625. However a head and shoulder chart pattern is forming on an intraday timeframe. A breakdown of the pattern would result in a fresh downside move towards the three-week low of 1.2500.

Broader strength in the GBP/USD pair has started fading as it is struggling to sustain above the 20-day Exponential Moving Average (EMA) at 1.2660. Momentum oscillators indicate a sideways performance ahead.

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 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.

Author

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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