Pound Sterling rebounds as focus shifts to employment data

  • Pound Sterling bounces back from the crucial support as investors shift focus to UK Employment data.
  • UK factory activity for June and Q2 GDP outperformed expectations significantly.
  • A tight labor market, alongside upbeat economic performance, could increase expectations of interest-rate peak.

The Pound Sterling (GBP) strengthens amid upbeat Q2 Gross Domestic Product (GDP) and factory data for June. The GBP/USD pair faces headwinds from bearish market sentiment ahead of the British employment data, which will be released on Tuesday at 6:00 GMT.

Stellar recovery in United Kingdom’s Q2 GDP data makes Bank of England (BoE) policymakers more comfortable in raising interest rates further so that a swift return of inflation to 2% can be ensured. If labor market conditions turn out tight and wage growth continues to be high, the deadly duo of upbeat economic outlook and tight employment would raise expectations of a higher interest-rate peak.

Daily Digest Market Movers: Pound Sterling capitalize on upbeat Factory data

  • Pound Sterling finds intermediate support near 1.2666. However, more downside seems favored amid the cautious market mood and upcoming UK Employment data, which will be published on Tuesday at 06:00 GMT.
  • The UK labor market is expected to add 50K new payrolls in the three months to June, less than the 102K it created in the prior three-month period. Meanwhile, the Claimant Count Change in July is expected to show a decline of 7.3K, swinging from an increase of  25.7K jobless claims in June.
  • Three-month Unemployment Rate is expected to remain unchanged at 4.0%.
  • A key catalyst in the UK employment report is the three-month Average Earnings excluding bonuses data in the three months to June, which is seen accelerating to 7.4% vs. the prior release of 7.3%.
  • Stubborn wage growth would increase the chances of further policy-tightening by the Bank of England as households would be equipped with higher disposable income.
  • Labor shortages and elevated food prices have been major contributors to higher inflationary pressures.
  • On Friday, factory activity and Q2 GDP data came in stronger than expected.
  • Monthly GDP swung from a contraction and grew by 0.5% in June, more than the 0.2% expected. In the January-March quarter, the economy contracted by 0.1%.
  • Quarterly GDP grew by 0.2% in 2Q, while analysts had forecasted a stagnant performance. The annual growth rate was 0.4%, doubling the consensus and the prior release of 0.2%.
  • Monthly Industrial Production for June expanded strongly, by 1.8% against the estimates for 0.1% growth. In May, industrial production contracted by 0.6%. On an annual basis, it rose significantly to 3.1%.
  • Manufacturing Production also grew strongly on a monthly basis, by 2.4%, well above the 0.2% forecasted.
  • Upbeat Manufacturing activity makes BoE policymakers more comfortable with elevating interest rates further. The rate-tightening cycle is unlikely to be paused as inflationary pressures are way higher than the desired rate of 2%.
  • Market sentiment remains bearish as both the United States Consumer Price Index (CPI) and the Producer Price Index (PPI) for July showed persistent price pressures.
  • US PPI, published on Friday, rose more than expected due to the rise in the cost of services.
  • Still, the Federal Reserve (Fed) is widely expected to keep interest rates steady in September as the modest pace in monthly inflation of 0.2% aligns with the Fed’s desired rate of 2%.
  • The US Dollar Index (DXY) trades at a fresh five-week high around 103.00 amid a cautious market mood.

Technical Analysis: Pound Sterling discovers support near 1.2660

Pound Sterling manages to hold above the immediate support of 1.2660. The Cable shifted into a bearish trajectory after a breakdown of the five-day Bearish Wedge chart pattern. GBP/USD trades below the 20- and 50-period Exponential Moving Averages (EMAs), signaling a bearish trend. A further break below the 1.2650 level would drag the major toward the 200-day EMA, which is at around 1.2464.

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