Sterling Advances vs Dollar as 100-Day Average Caps Gains

Key Moments

GBP/USD Supported by Softer US Labor Data

The GBP/USD pair is trading in positive territory around 1.3360 during the early European session on Friday. The British Pound is firming against the US Dollar after US Nonfarm Payrolls data came in weaker than anticipated.

Evidence of a moderating US labor market has led market participants to scale back expectations for an imminent interest rate increase by the US Federal Reserve. This shift has pressured the US Dollar and provided support for the GBP/USD pair.

According to the CME FedWatch tool, financial markets are currently assigning nearly a 52% probability of a US rate hike by September, compared with 66% before the latest employment figures were released.

Political Developments in the UK Under Scrutiny

Investors are also monitoring political dynamics in the United Kingdom following Keir Starmer’s resignation last week. Natixis analysts noted that Andy Burnham’s emphasis on fiscal discipline is offering some near-term reassurance, but they added that markets will pay close attention to upcoming budgets for any indication that fiscal rules might be loosened to fund higher public expenditure.

Technical Overview: Resistance and Support Levels

On the daily chart, GBP/USD is trading above the middle line of the Bollinger Bands, which is providing a modestly constructive backdrop. However, the pair remains capped by the 100-day simple moving average.

The Relative Strength Index is hovering around 54, indicating slightly positive momentum that is not yet stretched.

On the upside, the first significant obstacle is the 100-day simple moving average, located near 1.3410. A daily close above this level would expose the upper Bollinger band around 1.3468.

On the downside, initial support is aligned with the Bollinger middle band at 1.3300. Below that, the lower Bollinger band near 1.3132 represents a deeper support area where a more pronounced decline could draw dip-buying interest within the broader trading range.

(The technical analysis of this story was written with the help of an AI tool.)

Understanding the Pound Sterling

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 Bank of England Decisions Affect GBP

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.

Role of Economic Data in GBP Movements

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.

Impact of Trade Balance on 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.