Pound Sterling turns sideways ahead of UK labor market data

Pound Sterling trades back and forth as investors shift focus towards the UK Employment data.
Soft wage growth data would soften inflation outlook and increase expectations of the BoE cutting interest rates.
Market volume to remain thin amid extended weekend in US markets.

The Pound Sterling (GBP) remains muted as investors await the United Kingdom labor market data for three-months ending November, which will be published on Tuesday. Investors are anticipating a sharp decline in the wage growth and see labor market conditions cooling further due to higher interest rates by the Bank of England (BoE) and deepening cost-of-living crisis amid stubborn consumer inflation.

Soft wage growth data would improve progress in inflation returning towards 2% as lower earnings will eventually result in a decline in households’ spending power. Stubbornly higher wage growth has remained a major booster of sticky consumer price inflation and a decline in the same will provide more relief to BoE policymakers.

The GBP/USD pair is likely to remain inside the woods as the United States markets are closed on Monday. Trading volume is expected to remain thin due to an extended weekend. However, persistent bets in favour of rate cuts from the Federal Reserve (Fed) in the March monetary policy meeting would keep the US Dollar Index (DXY) on the backfoot.

Daily Digest Market Movers: Pound Sterling remains sideways on closed US markets

Pound Sterling struggles for a decisive move as investors await the United Kingdom labor market data for three months ending November, which will be published on Tuesday.
Demand for labor is expected to remain vulnerable as job postings by the United Kingdom employers were 32% lower in December from a year ago. The Recruitment and Employment Confederation (REC) department said that permanent jobs declined all through 2023.
Investors have projected a slight rise in the Unemployment Rate to 4.3% against the prior reading of 4.2%.
The market participants will keenly focus on the Average Earnings data as robust wage growth has remained a key driver keeping consumer price inflation elevated in the United Kingdom economy.
Average Earnings excluding bonuses is expected to decelerate sharply to 6.6% against 7.3% growth in the period of quarter-to-October while earnings data including bonuses is expected to soften to 6.8% from 7.2% in a similar period.
A sharp decline in wage growth would wane fears of persistent inflation and escalate odds of early rate cuts by the Bank of England.
The Bank of America (BofA) predicts the BoE will consider cutting interest rates after its August monetary policy meeting. This contrasts with prior expectations of February 2025.
On the contrary, BoE policymakers have not publicly discussed rate cuts at all as the consumer price inflation in the UK economy is highest in comparison with other Group of Seven economies.
BoE policymakers have been reiterating the need to keep interest rates in an elevated trajectory to ensure that inflation will return to 2% in a sustainable manner.
After being vulnerable in 2023, the British real estate sector has made a decent start to2024. The UK’s leading real estate platform Rightmove reported a 1.3% increase in asking prices in the period of December 3 to January 6, the highest since 2020.
The market mood is quiet amid an extended weekend in the United States market due to it being Martin Luther King Day.
The US Dollar Index (DXY) trades back-and-forth around 102.40 as investors shift focus towards the monthly Retail Sales data and the release of the Federal Reserve’s (Fed) Beige Book on Wednesday.
Meanwhile, investors’ confidence towards a rate cut decision from the Fed in March has improved after the release of the softer-than-projected Producer Price Index (PPI) report for December.
As per the CME FedWatch tool, chances supporting a rate cut in March have improved to 70% after declining to 62% last week.

Technical Analysis: Pound Sterling consolidates above 1.2700

Pound Sterling trades listless above the crucial support of 1.2700 as investors await the crucial UK data for further action. The GBP/USD pair has oscillated in a range between 1.2674-1.2784 for the past week. The broader appeal is still bullish as the 20 and 50-day Exponential Moving Averages (EMAs) are sloping higher. The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating a consolidation ahead. Fresh upside in Cable is expected if it manages to climb above five-month high around 1.2820.

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.