Pound Sterling plummets on upbeat US NFP data

  • Pound Sterling witnesses a sharp sell-off after robust US employment and wage data.
  • UK recession fears have deepened as the BoE has delivered a hawkish interest-rate outlook
  • The US Dollar recovers sharply as the Fed may emphasise on keeping rates restricted.

The Pound Sterling (GBP) falls sharply from fresh weekly highs in the early New York session on Friday as the United States Bureau of Labor Statistics (BLS) has reported an upbeat labor report – the Nonfarm Payrolls (NFP) for January. Gains were generated on expectations that the Bank of England (BoE) is expected to start reducing interest rates after the Federal Reserve (Fed) and the European Central Bank (ECB) vanished.

Recent monetary policy statements from Federal Reserve Chair Jerome Powell, European Central Bank President Christine Lagarde, and Bank of England Governor Andrew Bailey indicated that the first two were more explicit about rate cuts. The Fed has already guided three rate cuts this year, and ECB’s Lagarde sees the central bank commencing the rate-reduction process in late summer. 

Like Jerome Powell, Andrew Bailey avoided speculation on rate cuts and warned that price pressures could pick up again in the second half of this year. The BoE chose to tame high price pressures over facing off deepening recession fears. The United Kingdom economy witnessed a decline in growth of 0.1% in the third quarter of 2023, and higher interest rates are expected to continue to place barriers to economic growth.

Daily Digest Market Movers: Pound Sterling turns negative while US Dollar delivers a V-shape recovery

  • Pound Sterling faces an intense sell-off against the US Dollar on stronger United States NFP data. Hiring was up by 20K at 353K from December's recruitment. Investors projected a moderate labor demand at 180K. December's payrolls were revised higher from 216K to 333K. 
  • The Unemployment Rate remained unchanged at 3.7% against expectations of 3.8%.
  • Monthly Average Hourly Earnings grew strongly by 0.6% against expectations of 0.3% and the prior increase of 0.4%. The annual wage growth rose by 4.5% vs. the estimated 4.1% and the former reading of 4.4%. Annual Average Hourly Earnings for December were revised from 4.1% to 4.4%.
  • This will empower arguments supporting keeping interest rates restricted by the Federal Reserve longer than market participants projected earlier.
  • The Pound Sterling failed to hold gains despite the Bank of England not expressing much about interest rate cuts while providing forward guidance on interest rates in the monetary policy announcement on Thursday.
  • In the monetary policy statement, BoE Governor Andrew Bailey said that a victory cannot be announced on inflation because price growth is expected to fall to 2% in Q2 of 2024, but it will pick up again in Q3.
  • The BoE advocated keeping interest rates restrictive until they got enough evidence that inflation would sustainably return to the 2% target.
  • While Andrew Bailey refrained from endorsing further quantitative tightening, policymakers Jonathan Haskel and Catherine Mann voted for a rate hike by 25 basis points (bps). BoE Swati Dhingra voted for a rate cut of the same size.
  • Higher interest rates are expected to worsen the UK’s labor market conditions further. In the latest projections report, the BoE sees the Unemployment Rate rising to 5% by the end of 2026.
  • The outlook for the UK economy is more vulnerable now as longer restrictive monetary policy could fade business optimism. Factories may refrain from fresh investment plans to avoid higher installment obligations.

Technical Analysis: Pound Sterling plummets below 1.2700

Pound Sterling witnesses a significant selling pressure near 1.2770 as upbeat US labor market data has dampened market sentiment. The GBP/USD pair plummets while attempting to deliver a breakout of the Descending Triangle chart pattern formed on a daily time frame. The downward-sloping trendline of the aforementioned chart pattern is placed from 28 December 2023 high at 1.2827 while the horizontal support is plotted from 21 December 2023 low at 1.2612. A decisive breakout will result in wider ticks and high volume.

The 14-period Relative Strength Index (RSI) faces pressure near 60.0 and is declining towards the 40.00 cushion. A slippage below the same would activate a downside momentum.

Nonfarm Payrolls FAQs

What are Nonfarm Payrolls?

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.

How does Nonfarm Payrolls influence the Federal Reserve monetary policy decisions?

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.

How does Nonfarm Payrolls affect the US Dollar?

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.

How does Nonfarm Payrolls affect Gold?

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.

Sometimes Nonfarm Payrolls trigger an opposite reaction than what the market expects. Why is that?

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.

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