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Pound Sterling rallies as US Dollar tumbles after weak US NFP

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FXStreet in Market News 12 388002
May 3, 2024 22:12

content provided with permission by FXStreet

  • The Pound Sterling recovers further above 1.2600 amid an improved market mood and a decline in the US Dollar.
  • Labor demand remains weak, and wage growth slowed in April boosting speculation for Fed rate cuts in June, weighing on the US Dollar.
  • The BoE is expected to start reducing interest rates from the September meeting.

The Pound Sterling (GBP) advances above the round-level resistance of 1.2600 against the US Dollar (USD) in Friday’s early New York session. The GBP/USD pair strengthens as the US Dollar tumbles after the United States Nonfarm Payrolls (NFP) report for April shows that labor demand was weak and wage growth slowed more than expected.

The US NFP report showed that nonfarm employers recruited 175K workers in April, lower than the consensus of 243K and the former reading of 315K, upwardly revised from 303K. The Unemployment Rate rises to 3.9% from 3.8% in  March. The Average Hourly Earnings data, which provides a fresh inflation outlook softened to 3.9% from the estimates of 4.0% and the prior reading of 4.1% on a year-on-year basis. Monthly figures grew at a slower pace of 0.2%, which were expected to rise steadily by 0.3%.

Signs of labor market conditions easing will boost Federal Reserve (Fed) rate-cut bets, which are currently anticipated in the September meeting. Meanwhile, investors await the US ISM Services Purchasing Managers Index (PMI) reports for April, which will be published at 14:00 GMT. The 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. 

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

  • The Pound Sterling extends its recovery above 1.2600 against the US Dollar as the market sentiment improves further after the release of the weak US NFP data. The report showed that labor demand turned out poor, and wage growth softened in April. S&P 500 futures have posted stellar gains ahead of US opening, suggesting a higher risk appetite of investors.
  • The US Dollar Index (DXY) hits a fresh three-week low around 104.50, weighed down by easing labor market conditions combined with weak Q1 Nonfarm Productivity data and 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. 
  • Apart from the cheerful market mood, expectations that the Bank of England (BoE) will start reducing interest rates later than what was anticipated earlier has also strengthened the GBP/USD pair. Financial markets see the 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.

Technical Analysis: Pound Sterling extends winning spell and jumps to 1.2600

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. 

The pair rises above 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.

Nonfarm Payrolls FAQs

Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.

The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation. A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work. The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.

Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower. NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.

Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa. Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold. Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.

Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components. At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary. The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.