Pound Sterling stays on sidelines ahead of Fed Powell’s speech

  • The Pound Sterling faces pressure above 1.2580 on cautious sentiment.
  • The UK Manufacturing PMI signaled expansion in March for the first time in two years.
  • Investors see the BoE kick-start the rate-cut cycle in June.

The Pound Sterling (GBP) struggles to extend recovery above 1.2580 in Wednesday’s late London session. Caution among market participants ahead of the United States Nonfarm Payrolls (NFP) data for March has offset the positive impact of the United Kingdom (UK) Manufacturing PMI’s return to growth.

The UK Manufacturing PMI surprisingly expanded in March after contracting for 20 months, driven by upbeat domestic demand for consumer goods. S&P Global/CIPS reported that business optimism rose to its highest level since April 2023, with 58% of manufacturers expecting their level of production to increase over the coming 12 months. The agency added: “Improved sentiment reflected signs of stronger demand, new product launches, a better trading environment, export opportunities and hopes the cost and supply situations would move closer to normal conditions.”

This week, the GBP/USD pair will be influenced by the US labor market data and market expectations about when the Bank of England (BoE) will start reducing interest rates. Currently, investors’ expectations for rate cuts have been brought forward to the June policy meeting from prior anticipation for August after UK inflation softened more than expected in February.

Daily digest market movers: Pound Sterling follows US Dollar’s footprints

  • The Pound Sterling ranges slightly below 1.2600 against the US Dollar (USD) ahead of key events. Investors shift focus to the speech from Federal Reserve Chairman Jerome Powell, which is expected at 16:10 GMT, and the United States NFP data, which will be published on Friday.
  • The speech from Fed Powell could provide more cues about when the central bank will start reducing interest rates. Currently, investors expect that the Fed will start reducing borrowing costs from the June meeting.
  • Meanwhile, upbeat US ADP Employment Change data for March has provided some support to the US Dollar. The US ADP showed that private employers hired 184K workers, higher than expectations of 148K and February’s reading of 155K, which were upwardly revised from 140K. The US Dollar Index (DXY) finds cushion near 104.70 after correcting from four-month high above slightly above 105.00.
  • On Tuesday, the upbeat S&P Global/CIPS Manufacturing PMI for March supported a rebound for the Pound Sterling. The agency reported that the Manufacturing PMI returned to expansion after contracting for 20 straight months. The Manufacturing PMI rose to 50.3, above the 50.0 threshold, beating expectations and the prior reading of 49.9.
  • Apart from the strong recovery in the Manufacturing PMI, British house prices rose 1.6% in March, the highest pace since December 2022. The activity in the housing sector has picked up despite the Bank of England maintaining interest rates at higher levels.
  • A strong recovery in the manufacturing and real estate sectors suggests that the recession in the second half of 2023 was likely shallow and that the economy has returned to growth. In such a case, the BoE could achieve a so-called “soft landing” – a situation when an economy gets inflation under control without triggering a recession.
  • Going forward, investors will focus on the S&P Global/CIPS Services PMI final data for March, which will be published on Thursday. The Services PMI is forecasted to have remained unchanged from its preliminary reading of 53.4.

Technical Analysis: Pound Sterling struggles to extend recovery above 1.2580

The Pound Sterling faces selling pressure while testing the breakout of last week’s consolidation formed in a range between 1.2575 and 1.2668. The Cable struggles to sustain above the 200-day Exponential Moving Average (EMA), which trades around 1.2570.

On a broader time frame, the horizontal support from December 8 low at 1.2500 would provide further cushion to the Pound Sterling. Meanwhile, the upside is expected to remain limited near an eight-month high of around 1.2900.

The 14-period Relative Strength Index (RSI) dips below 40.00. If it sustains below this level, bearish momentum will trigger.


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.


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