Pound Sterling rises as UK Labour win prompts political stability, US wage growth slows

July 5, 2024 1:38 pm

  • The Pound Sterling performs strongly, as Keir Starmer’s outright majority win as UK PM has brought stability on the political front.
  • Investors expect the BoE to begin reducing interest rates from August.
  • US wage growth slows expectedly while payrolls beat estimates.

The Pound Sterling (GBP) exhibits sheer strength against major peers, except the Japanese Yen (JPY), in Friday’s American session. The British currency performs strongly as United Kingdom (UK) Prime Minister Rishi Sunak-led-Conservative Party suffered a defeat after remaining in power since 2010 from the Keir Starmer-led-Labour Party in parliamentary elections on Thursday.

Investors expect that an absolute majority of the Labour Party has significantly improved the Pound Sterling’s appeal. A political party’s outright majority win is considered favorable for its financial markets, unlike when the Tories were in power.

Also, the Pound Sterling would outperform strongly against currencies from the European Union (EU) and the United States (US), which are expected to face pressure due to political uncertainty.

On the monetary policy front, investors expect the Bank of England (BoE) to start cutting interest rates from the August meeting. The next trigger for the Pound Sterling will be the monthly Gross Domestic Product (GDP) and factory data for May, which will be published on Thursday, July 11.

Daily digest market movers: Pound Sterling adds more gains against US Dollar as US wage growth slows

  • The Pound Sterling tests the crucial resistance of 1.2800 against the US Dollar (USD) in Friday’s American session. The GBP/USD pair strengthens as the United States (US) Nonfarm Payrolls (NFP) report showed that Average Hourly Earnings softens as expected. Monthly and annual Average Hourly Earnings data grew at a slower pace of 0.3% and 3.9%, respectively. The Average Hourly Earnings data gauges wage growth momentum and a slowdown in the same would diminish upside risks to inflation.
  • Meanwhile, labor demand remained strong in June. Fresh payrolls came in higher at 206K than estimates of 190K but were lower than May’s reading of 272K. The Unemployment Rate rose to 4.1% from the estimates and the previous release of 4.0%.
  • The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, remains on the backfoot near the crucial support of 105.00. The US Dollar’s appeal is already vulnerable as the confidence of investors in the Federal Reserve (Fed) to begin reducing interest rates from the September meeting has increased. 
  • According to the CME FedWatch tool, 30-day Federal Funds futures pricing data shows that the probability of rate cuts in September has improved to 74.4% from 64% recorded a week ago. The data also shows that the Fed will deliver subsequent rate cuts in November or December.

Technical Analysis: Pound Sterling aims to stabilize above 78.6% Fibo retracement

The Pound Sterling posts a fresh three-week high at 1.2800 against the US Dollar. The GBP/USD pair strengthens after breaking above the 61.8% Fibonacci retracement at 1.2670, plotted from the March 8 high of 1.2900 to the April 22 low at 1.2300. The Cable has now reached the 78.6% Fibonacci retracement at 1.2770.

The pair rises above the 20-day and 50-day Exponential Moving Averages (EMAs) near 1.2695 and 1.2675, respectively, suggesting that the near-term outlook is bullish.

The 14-day Relative Strength Index (RSI) rises above 60.00. A sustained move above this level would shift momentum towards the upside. 

Economic Indicator

Average Hourly Earnings (YoY)

The Average Hourly Earnings gauge, released by the US Bureau of Labor Statistics, is a significant indicator of labor cost inflation and of the tightness of labor markets. The Federal Reserve Board pays close attention to it when setting interest rates. A high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

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