The Pound Sterling (GBP) is trading within a narrow range near 1.2900 against the US Dollar (USD) during the London session on Friday. As investors await the release of the United States Nonfarm Payrolls (NFP) data for October at 12:30 GMT, the GBP/USD pair is in a consolidation phase. This crucial labor market report is anticipated to shape market expectations regarding the Federal Reserve’s (Fed) interest rate trajectory for the remainder of the year.
Analysts predict that the NFP report will indicate the addition of 113,000 jobs, significantly lower than the 254,000 jobs added in September. The unemployment rate is expected to hold steady at 4.1%. However, there is a notable divergence in expectations compared to Wednesday’s ADP Employment Change report, which revealed that the private sector added 233,000 jobs in October, suggesting an improvement in labor market conditions.
Additionally, Initial Jobless Claims for the week ending October 25 decreased to 216,000, surpassing estimates of 230,000, marking the lowest level in nearly 22 weeks. This uptick in labor demand could reduce the risk of an economic downturn, allowing the Fed to pursue a more gradual approach to interest rate cuts. According to the CME FedWatch tool, the central bank is expected to lower rates by 25 basis points in both November and December policy meetings.
In the North American session, market participants will also closely monitor Average Hourly Earnings and the ISM Manufacturing PMI for October. Average Hourly Earnings, a crucial indicator of wage growth, is projected to rise by 4% year-over-year, with a month-on-month increase estimated at 0.3%, a slowdown from September’s 0.4% rise. Meanwhile, the PMI index is expected to improve slightly to 47.6 from 47.2 in September, indicating continued contraction in the US manufacturing sector, albeit at a slower pace.
In a broader market context, the Pound Sterling exhibited mixed performance against major currencies on Friday. After a significant drop on Thursday, it appears to have stabilized as traders reassess the anticipated interest rate cuts from the Bank of England (BoE) for the remainder of the year. Current projections suggest a possible rate cut in one of the upcoming meetings in November or December, with an 80% chance of a 25 basis point reduction on Thursday, bringing rates down to 4.75%.
Conversely, analysts from the Bank of Montreal (BMO) predict that the BoE may opt to maintain its interest rates at 5% during its Thursday meeting due to several influencing factors. They argue that given the composition of the Monetary Policy Committee (MPC) and the impact of recent budget measures on BoE projections and inflation persistence, at least five policymakers might vote to keep rates unchanged.
Speculation regarding BoE interest rate cuts has lessened following the announcement of a £40 billion tax increase, the highest since 1993, by the UK Chancellor of the Exchequer. This initiative aims to address the fiscal deficit while enhancing public spending and investment. Furthermore, the Office for Business Responsibility (OBR) has revised its inflation forecasts for 2024 and 2025 to 2.5% and 2.6%, respectively, prompting traders to further scale back their rate-cut expectations.
From a technical standpoint, the Pound Sterling is under pressure, trading near an 11-week low of approximately 1.2850 against the US Dollar. The near-term trend for the GBP/USD pair appears uncertain, remaining below the 50-day Exponential Moving Average (EMA) around 1.3060 while finding support near the 200-day EMA at 1.2850.
The GBP/USD pair has also broken down from a Rising Channel formation on the daily time frame, indicating a bearish reversal. The 14-day Relative Strength Index (RSI) has dipped into the 20.00-40.00 range, signaling renewed bearish momentum. Key support for the Pound Sterling is seen at the psychological level of 1.2800, while resistance is anticipated near the 50-day EMA around 1.3060.
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