- The Pound Sterling recovers as weak US ADP Employment data improves market mood.
- Focus remains over the Fed and the BoE monetary policy meetings.
- The Fed and the BoE are widely expected to leave interest rates unchanged.
The Pound Sterling (GBP) rebounds on Wednesday’s early New York session as the US Automatic Data Processing (ADP) has reported a slowdown in labor demand. US employers hired only 107K workers in January, which were significantly lower than expectations of 145K and the former reading of 158K. This has built pressure on the US Dollar.
Meanwhile, market brace for the US Federal Reserve’s (Fed) monetary policy meeting. Investors see the Fed leaving interest rates unchanged in the range of 5.25%-5.50%, shifting their focus towards any guidance about when the central bank will start cutting interest rates and at which speed. In its last monetary policy meeting, the Fed projected a 75-basis-points (bps) reduction in interest rates in 2024.
The GBP/USD pair trades broadly sideways, but a defined action is expected after the Fed and Bank of England (BoE) announce their first monetary policy decisions of 2024. The BoE is also expected to maintain the status quo for the fourth time in a row. Price pressures in the United Kingdom economy have peaked now, but investors lack confidence about inflation returning to the 2% target in a sustainable manner.
Apart from the Fed decision, market volatility is expected to increase this week as it will be followed by the Institute of Supply Management (ISM) Manufacturing PMI and Nonfarm Payrolls (NFP) data, which will be published on Thursday and Friday, respectively.
Daily digest market movers: Pound Sterling bounces back on downbeat US Employemnt data
- The Pound Sterling recovers intarday losses as the market mood improves on downbeat US private Employment data, ahead of the interest rate decision by the Federal Reserve.
- The Fed is anticipated to maintain status-quo, suggesting there is no rush for delivering a dovish signal as inflation in the United States economy is still far from the desired rate of 2%.
- The progress in inflation declining towards the 2% target has slowed as labor market conditions are strong, consumer spending is robust, and the economy is growing at a stronger pace.
- Further moves in the Pound Sterling will also be driven by the Bank of England’s monetary policy decision, which will be announced on Thursday.
- Like the Fed, the BoE is expected to deliver a steady interest rate decision for the fourth straight time, leaving interest rates unchanged at 5.25%.
- As an unchanged monetary policy decision is widely anticipated, market participants will majorly focus on the interest rate outlook.
- Unlike the Fed and the European Central Bank (ECB), BoE policymakers have not discussed the timing or scope of interest rate cuts in 2024. Therefore, discussions about rate cuts would be considered as bearish for the Pound Sterling.
- The reasoning behind BoE’s emphasis on keeping interest rates at the current levels is elevated inflation, which is higher in the UK in comparison with other members of the Group of Seven economies.
- Meanwhile, vulnerable economic growth could be a factor that will force BoE policymakers to discuss rate cuts.
- The Lloyds Bank Business Barometer rose to a two-year high of 44% amid hopes of softer inflation and interest rate cuts. The survey showed that businesses are planning to increase their workforce ahead.
Technical Analysis: Pound Sterling reclaims 1.2700
Pound Sterling recovers to near the round-level resistance of 1.2700 as market sentiment improves after weaker-than-projected US private payrolls data. The Cable is broadly stuck in a tight range between 1.2640-1.2775 during the last two weeks.
A descending triangle formation is visible on the daily timeframe, which indicates that investors are on the sidelines. The horizontal support of the aforementioned chart pattern is plotted from the December 21 low at 1.2612, while the downward-sloping trendline is placed from the December 28 high at 1.2827. The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, which indicates a lackluster move ahead.
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.
Read More:Pound Sterling recovers on weak US ADP Employment data, Fed, BoE policy in focus
2024-01-31 13:52:00