British Pound strengthens to near 1.3350 as cooling US labor market weighs US Dollar

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The GBP/USD pair trades with mild gains near 1.3350 during the early Asian trading hours on Friday. The US Dollar (USD) edges lower against the British Pound (GBP) on a weaker-than-expected US Nonfarm Payrolls (NFP) report. The US markets will be closed on Friday in observance of Independence Day.

GBP/USD gains ground to around 1.3350 in Friday’s early Asian session.
US job growth slowed sharply in June.
Markets see a 90% chance of a BoE hike by year-end.

The US NFP rose by 57,000 in June, falling short of expectations of 110,000, the US Bureau of Labor Statistics (BLS) showed on Thursday. The Unemployment Rate fell to 4.2% during the same period, down from 4.3% in May. That followed a report on Wednesday showing that US private payrolls increased less than expected in June.

These reports suggested a cooling labor market and prompted financial markets to dial back expectations for a near-term interest rate hike from the US Federal Reserve (Fed). Financial markets are now pricing in nearly a 52% probability of a US rate hike by September, down from 66% before the jobs data, according to the CME FedWatch tool.

Traders will closely monitor the developments surrounding UK politics since Keir Starmer stepped down last week. Natixis analysts said while Burnham's commitment to fiscal discipline offers near-term support, markets will closely monitor future budgets for any signs that fiscal rules are being relaxed to finance higher public spending.

The Bank of England (BoE) will meet later this month to discuss monetary policy, and economists predict there will be no change in interest rates. Money markets ‌show traders see a 90% odds of a BoE hike by the end of this year, per Reuters.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.