- Traders anticipate interest rate cuts from the Federal Reserve, potentially driving the pound sterling down to around 1.3160 against the US dollar.
- Economists are hopeful for a rate reduction by the Bank of England next week.
- Investors are on the lookout for the US Non-Agricultural Payroll and ISM Manufacturing PMI reports for July.
The pound sterling (GBP) is expected to decline to about 1.3160 against the US dollar (USD) during Friday’s trading in Europe. This dip comes as the USD is gaining ground amidst expectations surrounding the Federal Reserve’s decision on interest rates in its upcoming meeting in September.
As of now, the US Dollar Index (DXY), which measures the dollar’s value against a basket of six major currencies, reached a two-month high of approximately 100.15.
Data from the CME FedWatch tool indicates that the likelihood of the Fed lowering interest rates in September has diminished, dropping from 58.4% a week ago to 39.2% now.
Several factors are influencing this shift in expectations for a rate cut. For one, recent economic reports showcased stronger-than-anticipated growth in US GDP and persistent inflation signals, particularly in the core personal consumption expenditures index for June. Additionally, Federal Reserve Chair Jerome Powell has indicated that there is no immediate need to reduce interest rates.
On Wednesday, the Fed maintained interest rates at their current range of 4.25% to 4.50%. Powell mentioned that adjusting monetary policy right now could add pressure to certain sectors.
Market Update: Pound Sterling Weakens
- The pound weakened compared to its peers on Friday, as investors turn their attention to upcoming monetary policy decisions from the Bank of England, set to be announced on Thursday.
- Market analysts predict a possible decrease of 25 basis points from the Bank of England, lowering the rate to 4%, given that price pressures continue to exceed the 2% target, reflecting some level of stagnation. An economist from Pantheon Macroeconomics stated, “One cut next week might appear necessary as inflation is likely to remain above the 2% target for 2026 and 2027.”
- In June, the UK headline consumer price index (CPI) came in at 3.6% year-over-year, surpassing expectations of 3.4%.
- Today’s trading in the GBP/USD pair might also be influenced by the US Non-Farm Payroll (NFP) data and the July ISM Manufacturing PMI, which will be released during North American trading hours.
- The US NFP report could significantly shape market views on the Fed’s monetary policy. Economists are forecasting an addition of 110,000 jobs, which is below the 147,000 jobs created in June, while the unemployment rate is expected to range from 4.1% to 4.2%.
- At a press conference, Powell stated that the struggles in the labor market are becoming apparent, yet indicators continue to point toward a strong job market amidst a cooling trend.
- Meanwhile, the ISM manufacturing PMI is predicted to slightly rise to 49.5 from 49.0 in June, implying continued but moderating declines in factory sector activity.
Technical Analysis: Sterling Weakens with Breakdown
The pound has dropped to approximately 1.3160 against the dollar on Friday. This bearish trend for the GBP/USD pair follows a breakdown below the neckline of a head and shoulders chart pattern.
The 20-day exponential moving average (EMA), which stands at around 1.3414, also suggests a bearish outlook in the short term.
Furthermore, the 14-day relative strength index (RSI) is well below 40.00, hovering at oversold levels, indicating that bearish momentum is still very much present.
The May 12 low at 1.3140 is likely to act as significant support, while the peak from July 30, near 1.3385, serves as a crucial resistance barrier.
Upcoming Economic Indicators
Non-Farm Payroll
The Non-Farm Payroll figures reveal the number of new jobs created in the US for the prior month across non-farm sectors. Released by the US Bureau of Labor Statistics (BLS), these numbers tend to be quite volatile and are subject to frequent revisions, which can cause fluctuations in the Forex market. Typically, higher figures are viewed as bullish for the USD, while lower ones may be considered bearish. However, interpretation often relies on comprehensive data from the complete BLS report.
