The Pound Sterling (GBP) experienced a notable decline to 1.2600. The weakening of the GBP/USD pair can be attributed to the positive United States Nonfarm Payrolls (NFP) data for March, which bolstered demand for the US Dollar.
According to the labor market report, NFP figures for February surpassed expectations at 303K, compared to the anticipated 200K and the previous reading of 270K (revised downward from 275K). Additionally, the Unemployment Rate dropped to 3.8%, surpassing expectations and the prior reading of 3.9%. Annual Hourly Earnings grew by the expected 0.3% on a month-on-month basis, while annual wage growth slowed to 4.1%, in line with expectations and down from the former reading of 4.3%.
The robust labor demand leading to increased wage growth, which can spur inflation, may prompt the Federal Reserve (Fed) to postpone plans for rate cuts. Neel Kashkari, President of the Minneapolis Fed Bank, cautioned on Thursday that rate cuts might not be necessary this year if inflation remains stable. He also indicated forecasting two rate cuts for 2024 in the latest dot plot.
Simultaneously, easing inflation expectations in the United Kingdom have weighed on the Pound Sterling. The recent Bank of England (BoE) Decision Maker Panel (DMP) survey for February revealed that most firms anticipate a slowdown in selling prices and wage inflation over the next year. Selling price expectations decreased to 4.1% from 4.3%, marking the lowest reading in over two years, while wage growth expectations softened to 4.9% on a three-month moving average basis from 5.2% in February.
Anticipated easing inflation expectations are likely to heighten BoE rate cut expectations for the June meeting. The growing prospects of early BoE rate cuts are adversely impacting the Pound Sterling.
In the broader market context, the Pound Sterling’s retreat to 1.2600 reflects cautious sentiment. Escalating tensions in the Middle East and diminished expectations of Federal Reserve rate cuts for June, following the upbeat United States NFP report for March, have facilitated the recovery of the US Dollar.
The killing of seven members of Iran’s Islamic Revolutionary Guard Corps (IRGC) by Israeli airstrikes in Damascus has heightened fears of Iran’s direct involvement in the Israel-Palestine conflict. Additionally, hopes for the Bank of England to shift towards rate cuts in June due to easing price pressures have further weakened the Pound Sterling. Expectations of BoE reducing rates from June were reinforced after BoE Governor Andrew Bailey stated that market expectations for two or three rate cuts this year are reasonable.
Furthermore, the soft Services PMI data for March in the United Kingdom, released on Thursday, has impacted the economic outlook. The Services PMI fell to 53.1, missing expectations and the prior reading of 53.4. Tim Moore, Economics Director at S&P Global Market Intelligence, noted that although the recovery in service sector output lost momentum in March, the overall picture remains reasonably positive.
From a technical perspective, the Pound Sterling faces selling pressure near 1.2680 after retreating from its two-week high. The GBP/USD pair struggles to sustain above the 20-day and 50-day Exponential Moving Averages (EMAs) around 1.2660, while finding support from the 200-day EMA at 1.2566.
Looking ahead, the Pound Sterling may find further support near the horizontal support level at 1.2500, originating from the December 8 low. However, the upside potential is expected to be limited near the eight-month high of approximately 1.2900.
The rebound of the 14-period Relative Strength Index (RSI) above 40.00, after dipping below it, is notable. Nevertheless, a definitive “bullish reversal” would only be confirmed with a decisive break above 60.00 on the RSI.
