• Wed. Feb 28th, 2024

The Pound Falls Because Investors Are Being Careful Before the Important US NFP Report

Leon Kramer

ByLeon Kramer

Jan 7, 2024

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  • The Pound Sterling experiences a significant recovery following the release of the positive US Nonfarm Payrolls data.
  • In December, PMI figures revealed that the services sector outperformed, despite the ongoing challenges faced by the UK manufacturing sector.
  • There is a strong possibility of a mild recession in the UK economy.

The Pound Sterling (GBP) has made significant gains against the US Dollar as market sentiment has improved, despite the release of positive US economic data. Despite the impressive performance of all components of the United States Nonfarm Payrolls data for December, the GBP/USD pair has shown strength. It appears that market participants have already taken into account the strong labor demand in the US economy.

As investors assess the challenging choices facing Bank of England (BoE) policymakers, the stability of Pound Sterling may be at risk. These decisions are complicated by the potential for a worsening recession in the UK economy and persistent high levels of inflation.

There is a significant possibility of a technical recession in the UK economy, given its contraction in the third quarter and the expected stagnant performance in the final quarter. In addition, the latest PMI data indicates that the manufacturing sector is still experiencing difficulties as a result of elevated interest rates. The GBP/USD pair’s outlook has become less optimistic due to potential changes in US employment indicators, which could impact the Federal Reserve’s guidance on interest rates.

The Pound Sterling Is Gaining Strength as the US Dollar Experiences a Decline

  • The Pound Sterling experiences a robust rebound in spite of the United States binding Employment data for December surpassing expectations.
  • In December, US employers saw an increase of 216K workers, surpassing the 199K jobs created in November. Investors also observed moderate job gains during this period.
  • The Unemployment Rate stays steady at 3.7%, defying predictions of a slight increase to 3.8%.
  • Average Hourly Earnings experienced consistent growth, maintaining a steady pace of 0.4%. The yearly increase in wages was 4.1%, which is slightly higher than the previous increase of 4.0%. Investors predicted a decrease in labor cost data, with a softening to 3.9%.
  • Chances of a rate reduction by the Federal Reserve in March have significantly diminished.
  • The US Dollar Index (DXY) experienced a significant decline after reaching a recent peak of 103.00, marking a three-week high.
  • Meanwhile, the British currency continues to face downward pressure as investors brace for a slight economic downturn in the United Kingdom. In the third quarter of 2023, there was a slight contraction of the country’s economy, with a decrease of 0.1%.
  • Policymakers at the Bank of England are currently facing a delicate situation, as they weigh the potential benefits of an early rate cut to avoid a recession against the potential risks of increased inflationary pressures.
  • Despite challenging conditions in both domestic and international markets, the manufacturing sector in the UK remains in a contraction phase. However, there is some positive news as the Services PMI, which measures activity in the services sector, experienced its most rapid expansion since June. 
  • According to a recent report by S&P Global, the Services PMI increased to 53.4 in December, surpassing projections of 52.7 and the previous reading of 50.9.
  • S&P Global reported that service activities experienced a notable increase in response to optimistic expectations of reduced interest rates and a renewed economy in 2024.

Pound Sterling Reclaims 1.2700 Level

The British Pound has surged close to the key resistance level of 1.2720, thanks to the increased risk appetite among market participants. The GBP/USD pair bounces back after finding significant demand around the 1.2625 level. Nevertheless, an intraday timeframe is showing the development of a head and shoulder chart pattern. An analysis of the trend could lead to a new decline, reaching the lowest point in the past three weeks at 1.2500. 

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The GBP/USD pair is losing its momentum as it faces difficulty in maintaining levels over the 20-day Exponential Moving Average (EMA) at 1.2660. Indicators suggest that there will be a period of lateral movement in the near future.

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Leon Kramer

Leon Kramer

Leon Kramer, a renowned financial author, enlightens Main Forex News readers with his deep understanding of currency markets. His years in global finance, combined with an intuitive grasp of trends, delivers insightful, up-to-the-minute foreign exchange analysis.

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