- Weak US ADP jobs data improved market mood and the pound recovered.
- The Fed and BoE’s monetary policy meetings remain in focus.
- The Fed and BoE are widely expected to keep interest rates on hold.
The British pound (GBP) rebounded in New York trading on Wednesday as US Automatic Data Processing (ADP) reported slowing labor demand. U.S. employers hired just 107,000 workers in January, well below expectations of 145,000 and the previous figure of 158,000. This increased pressure on the US dollar.
Meanwhile, the market is bracing for the US Federal Reserve’s monetary policy meeting. Investors expect the Fed to keep interest rates unchanged in a range of 5.25% to 5.50%, with the focus shifting to guidance on when and how fast it will start cutting rates. At its last monetary policy meeting, the Fed predicted it would cut interest rates by 75 basis points (bps) in 2024.
The GBP/USD pair is trading broadly sideways, but clear 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 history. line. Price pressures in the UK economy have now peaked, but investors lack confidence that inflation will return to the 2% target in a sustainable manner.
Market volatility is expected to increase this week as the Institute for Supply Management (ISM) manufacturing PMI and nonfarm payrolls (NFP) statistics are released on Thursday and Friday, respectively, independent of the Fed’s decision. .
A daily digest that moves the markets: British pound rebounds after lackluster US jobs report
- Ahead of the Federal Reserve’s interest rate decision, market mood improved due to lackluster US private employment data, and the pound recovered from intraday losses.
- The Fed is expected to maintain its status quo, suggesting there is no rush to send a dovish signal as the US economy’s inflation rate remains far from the desired 2%.
- Progress in lowering inflation towards the 2% target is slowing, with favorable labor market conditions, solid consumer spending and the economy growing at a stronger pace.
- Further movements in the pound will also depend on the Bank of England’s monetary policy decision, which will be announced on Thursday.
- Like the Fed, the BOE is expected to make its fourth consecutive stable interest rate decision, leaving rates unchanged at 5.25%.
- Market participants will be primarily focused on the outlook for interest rates, as monetary policy decisions are widely expected to remain unchanged.
- Unlike the Fed and European Central Bank (ECB), central bank policymakers have not discussed the timing or extent of rate cuts in 2024. Any discussion of rate cuts would therefore be seen as bearish for sterling.
- The Bank of England’s emphasis on keeping interest rates at current levels is driven by rising inflation, which is higher in the UK than other G7 countries.
- On the other hand, weak economic growth could force central bank policymakers to discuss rate cuts.
- Lloyds Bank’s economic barometer rose to 44%, the highest level in two years, on expectations of slowing inflation and lower interest rates. The survey showed that companies are planning to increase their workforce in the future.
Technical analysis: GBP recovers to 1.2700
Sterling has recovered to round-level resistance around 1.2700 as market sentiment improves following weaker-than-expected US private employment data. For the past two weeks, the cable has been mostly stuck within a narrow range between 1.2640 and 1.2775.
On the daily time frame, we see the formation of a descending triangle, indicating that investors are on the sidelines. Horizontal support for the aforementioned chart pattern is plotted from the December 21st low of 1.2612, and the downward trend line is placed from his December 28th high of 1.2827. The Relative Strength Index (RSI) for the 14-period period has been in the range of 40.00 to 60.00, indicating that future movements will be slow.
Employment FAQ
Labor market conditions are an important factor in assessing the health of the economy and are a key factor in currency valuation. High employment or low unemployment rates have a positive impact on consumer spending, and thus economic growth, boosting the value of the local currency. Furthermore, a very tight labor market, i.e., a shortage of workers to fill vacant positions, also contributes to the level of inflation, as low labor supply and high demand lead to higher wages. may influence policy.
For policymakers, the pace of wage growth in the economy is key. High wage growth means households have more money to spend, which usually leads to higher prices for consumer goods. Wage increases are seen as an important component of underlying and persistent inflation, as they are unlikely to be reversed, in contrast to more volatile sources of inflation such as energy prices. Central banks around the world pay close attention to wage growth data when determining monetary policy.
The weight each central bank assigns to labor market conditions depends on its objectives. Some central banks have explicit labor market-related duties beyond controlling inflation levels. For example, the US Federal Reserve (Fed) has a dual mission of promoting maximum employment and price stability. Meanwhile, the European Central Bank’s (ECB) sole responsibility is to control inflation. Still, labor market conditions are an important factor for policymakers, whatever their mandate, given their importance as a measure of economic health and their direct relationship to inflation. .
