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Five-week high: pound gains on UK jobs and BoE talk
- 1.3400 breached as GBP/USD reaches its strongest level since mid-September.
- 4.7% unemployment rate marks a decline; MPC member Greene cautions that pay growth is no longer easing.
- 3.4% UK CPI forecast for Wednesday; BoE Governor Bailey to speak on Thursday.
GBP/USD briefly exceeded 1.3400. Tuesday's UK employment figures strengthened the case for a Bank Rate increase on November 5, lifting the pair to its strongest level since mid-September. From around 1.3300, it advanced to just above 1.3400 before finishing marginally below that level.
At 4.7%, unemployment in the three months to August was below the 4.9% forecast. Pay growth excluding bonuses accelerated to 3.7%, a tenth above expectations. Although the release also showed 30.3K additional jobless benefit claimants, more than half again the 19.4K forecast, traders focused on the unemployment rate.
Pay growth is no longer slowing, according to Bank of England (BoE) Monetary Policy Committee (MPC) member Greene, who backed a rate increase in September. She argued for early BoE action to prevent higher prices feeding through to wages. Market pricing assigns roughly a 95% probability to an increase in the Bank Rate from 3.75% on November 5. Such a move would bring it into line with the upper end of the Fed's 3.75%-4.00% range.
3.4% UK CPI forecast leads the calendar
A rise to 3.4% from 3.1% is forecast for Wednesday's UK Consumer Price Index (CPI) release at 06:00 GMT. Core CPI is expected at 2.7%, up from 2.6%. Thursday brings a speech by BoE Governor Bailey at 10:50 GMT. Retail sales follow on Friday at 06:00 GMT, with a 0.1% decline forecast after a 0.5% increase. All three events will inform the November 5 decision.
Friday's US calendar starts with S&P Global's business surveys at 13:45 GMT. At 14:00 GMT, University of Michigan sentiment is expected to hold at 46.3. That will be the last US release ahead of the Fed's October 28 decision.
200-day EMA reached as GBP/USD recovers
For the first time in more than a month, GBP/USD's advance brought it back to the 200-day Exponential Moving Average (EMA). The 50-day EMA sits below it, near 1.3350. The recovery from the October 14 low just below 1.3150 has now retraced about half the decline from August's high just under 1.3700. Daily momentum has entered overbought territory for the first time since late August.
Daily price chart: GBP/USD
Pound Sterling: key questions
Dating from 886 AD, the Pound Sterling (GBP) is the world's oldest currency and serves as the United Kingdom's official currency. According to 2022 data, it ranks fourth globally by foreign exchange (FX) trading activity, representing 12% of all transactions with average daily turnover of $630 billion. Among its main pairs, GBP/USD, known as ‘Cable’, represents 11% of FX trading. GBP/JPY, which traders call the ‘Dragon’, accounts for 3%, while EUR/GBP accounts for 2%. The Bank of England (BoE) issues the Pound Sterling.
Monetary policy set by the Bank of England has the greatest influence on the Pound Sterling's value. Decisions depend on whether the BoE has met its main objective of “price stability” – inflation holding at around 2%. Interest rate adjustments are its principal means of meeting that objective. To curb excessive inflation, the BoE seeks to raise borrowing costs through higher interest rates, making credit more expensive for households and businesses. GBP generally benefits because higher rates increase the appeal of the UK to global investors looking to place their funds. By contrast, inflation that is too low signals a slowdown in economic growth. The BoE would then consider cutting rates to reduce the cost of credit and encourage businesses to borrow more for investment in projects that generate growth.
The Pound Sterling can respond to economic releases because they provide a measure of the economy's health. GDP, Manufacturing and Services PMIs, and employment figures can all help determine GBP's direction. Sterling benefits from a robust economy, which draws in foreign investment and may prompt the BoE to raise interest rates, directly strengthening GBP. Conversely, weak economic figures are likely to weigh on the Pound Sterling.
The Trade Balance is another important release for the Pound Sterling. Over a specified period, it records the gap between a country's export earnings and its spending on imports. Strong overseas demand for a country's exports benefits its currency through the additional demand from foreign buyers purchasing those goods. A positive net Trade Balance therefore supports a currency, while a negative balance has the opposite effect.
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