- Pound Sterling vs US Dollar stabilizes above the key 1.2600 level prior to Nonfarm Payrolls data on Friday.
- The Pound benefits from monetary policy divergence with the US Dollar as elevated inflation suggests more hikes in the UK.
- Is the break above April highs in the upper 1.25s decisive enough to extend? Friday’s close could be critical in deciding.
The Pound Sterling (GBP) establishes a foothold above the 1.2600 handle against the US Dollar (USD) ahead of the Nonfarm Payrolls (NFP) release on Friday. The Pound Sterling benefits from the UK monetary policy divergence with the US, the after effects of positive UK PMI data, and early local election results to climb to fresh year-to-date highs. The US Dollar retreats, meanwhile, on renewed banking crisis fears as more regional lenders flag concerns.
From a technical perspective, GBP/USD continues to make new 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
- The Pound Sterling is profiting from 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 (in the case of the ECB) 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.
- The Nonfarm Payrolls release out at 12:30 GMT on Friday could be a major mover for the US Dollar as it will reveal the health of the jobs market and act as an acid test for Powell’s hawkish rhetoric at the recent FOMC press conference, in which he said the labor market in the US remained “tight”.
- A below-expectations result (i.e. below 150K) would hurt the US Dollar and see GBP/USD rally higher – a higher-than-expected result (more than 200K) would see the US Dollar rally and the Cable decline.
GBP/USD technical analysis: Pushing to new highs
GBP/USD has pushed to new year-to-date highs above 1.2600 overnight, extending the established uptrend that began at the September 2022 lows. The overall trend remains bullish favoring Pound Sterling longs over shorts.
It is still difficult to determine whether the recent break above the 1.2593 April 28 highs can be classed as ‘decisive’ and therefore indicative of further gains to come. If Friday ends on a strong bullish close near its highs it will suggest the break has been decisive, as it will complete three bullish green up days in a row that have in aggregate breached the April resistance highs. This would suggest the break is not ‘false’ or a bull trap and embolden bulls to push higher. A weak close, however, will bring into doubt the validity of the breakout and could lead to declines.
If the breakout is decisive and price runs higher then the next key resistance level at circa 1.2680 provides an upside target for the pair.
Decisive breaks are usually characterized by moves that begin with a strong green daily bar that breaks above the ceiling level or 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.
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.
