Pound Sterling exhibits strength with eyes on US NFP

• The Pound Sterling recovers further to 1.2550 amid an improved market mood and a decline in the US Dollar.
• The BoE is expected to start reducing interest rates from the September meeting.
• Investors should brace for high volatility ahead of US NFP at 12:30 GMT.

The Pound Sterling (GBP) rises to 1.2550 against the US Dollar (USD) in Friday’s London session. The GBP/USD pair strengthens as financial markets see the Bank of England (BoE) reducing interest rates from the September meeting, more or less in line with expectations of the US Federal Reserve making a similar move. Earlier, investors were divided between the June or August meeting.

The speculation about the BoE pivoting to interest rate cuts has been postponed as investors remain worried about strong wage growth in the United Kingdom, which is feeding the core Consumer Price Index (CPI), the central bank’s preferred inflation measure.

For the headline inflation, BoE Governor Andrew Bailey said he is confident that it will return to the desired rate of 2%. The next BoE’s monetary policy decisionich will be announced on May 9, and markets expect the bank to hold interest rates steady at 5.25%. Investors will keenly focus on whether Andrew Bailey sticks to its statement that expectations for two or three rate cuts are reasonable this year, as stated in March’s policy meeting.

Daily digest market movers: Pound Sterling rises while US Dollar trades around three-week low

• The Pound Sterling extends its recovery to 1.2550 against the US Dollar as the market sentiment is positive despite uncertainty ahead of the release of the United States Nonfarm Payrolls (NFP) and the ISM Services Purchasing Managers Index (PMI) reports for April. The S&P 500 sharply recovered on Thursday gaining around 0.90% and suggesting a higher risk appetite of investors.
• US nonfarm employers are expected to have recruited 238K workers in April, lower than the former reading of 303K. The Unemployment Rate is estimated to remain steady at 3.8%. Investors will keenly focus on the Average Hourly Earnings data, which will provide a fresh inflation outlook. The annual wage growth is expected to have softened to 4.0% from 4.1% in March, with monthly figures increasing steadily by 0.3%.
• Strong labor demand and higher wage growth would allow the Federal Reserve to delay rate cut plans while signs of labor market conditions easing will boost rate cut bets, which are currently anticipated in the September meeting.
• The ISM Services PMI, which represents the service sector that accounts for two-thirds of the economy, is expected to rise to 52.0 from 51.4 in March. 
• Apart from the cheerful market mood, a sharp decline in the US Dollar has also strengthened the GBP/USD pair. The US Dollar Index (DXY) trades close to a three-week low around 105.20, weighed down by weak Q1 Nonfarm Productivity data combined with Fed’s less hawkish guidance on interest rates than feared.
• The Q1 Nonfarm Productivity data, which reflects hourly output per worker, grew at a significantly slower pace of 0.3% from expectations of 0.8% and a strong reading of 3.5% in the last quarter of 2023. 
• On Wednesday, investors observed that the Fed remains leaning towards easing restrictive policy this year after listening to the monetary policy statement and Fed Chair Jerome Powell’s press conference. Jerome Powell acknowledged that progress in disinflation has stalled but remains hopeful that rate cuts are eventual this year. The Fed also slowed the pace of tapering the balance sheet. The Fed said that starting on June 1 it will reduce the cap on Treasury securities it allows to mature and not be replaced to $25 billion from its current cap of up to $60 billion per month, Reuters reported. 

Technical Analysis: Pound Sterling extends winning spell and jumps to 1.2550

The Pound Sterling extends its winning spell for the third trading day on Friday. The GBP/USD pair holds gains above the psychological support of 1.2500. The near-term outlook of the Cable is upbeat as it holds above the 20-day Exponential Moving Average (EMA), which trades around 1.2520. While the long-term outlook is uncertain as the asset has yet not delivered a decisive break above the 200-day EMA near 1.2555.

The pair continues to face pressure near the neckline of the Head and Shoulder pattern. On April 12, Cable witnessed an intense sell-off after breaking below the neckline of the H&S pattern plotted from December 8 low around 1.2500.

The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.