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Pound Sterling strengthens as UK chooses Keir Starmer as their next PM

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FXStreet in Market News 12 400825
July 5, 2024 18:09

content provided with permission by FXStreet

  • 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.
  • The US Dollar will dance to the tunes of US NFP data for June.

The Pound Sterling (GBP) exhibits sheer strength against major peers, except the Japanese Yen (JPY), in FridayÂ’s London 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 SterlingÂ’s appeal. A political partyÂ’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 gains further against the US Dollar

  • The Pound Sterling extends its upside to near 1.2780 against the US Dollar (USD) in FridayÂ’s European session. The GBP/USD pair posts a fresh three-week high and is expected to rally further towards the round-level resistance of 1.2800 amid sheer sell-off in the US Dollar.
  • The US Dollar Index (DXY), which tracks the GreenbackÂ’s value against six major currencies, slides further to near the crucial support of 105.00. The US DollarÂ’s appeal becomes 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.
  • In FridayÂ’s session, investors will focus on the United States (US) Nonfarm Payrolls (NFP) data for June, which will be published at 12:30 GMT. The official labor market data will significantly influence market speculation about Fed rate cuts in September.
  • The NFP report is expected to show that employers added 190K payrolls, significantly lower than the prior release of 272K. The Unemployment Rate is estimated to have remained steady at 4%. Investors will also pay attention to the Average Hourly Earnings data, which gauges wage growth momentum. Annual Average Hourly Earnings are forecasted to have decelerated to 3.9% from 4.1% in May. On a monthly basis, the wage growth measure is estimated to have risen at a slower pace of 0.3% from the prior month of 0.4%.
  • Stronger-than-expected wage growth and payrolls data would weaken expectations that the Federal Reserve (Fed) will start reducing interest rates in September, while weak numbers will boost them.

Technical Analysis: Pound Sterling approaches 1.2800

The Pound Sterling posts a fresh three-week high slightly below 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. 

Pound Sterling FAQs

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, aka ‘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).

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.

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.

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.