The Pound Sterling (GBP) moves higher to 1.2570 against the US Dollar (USD) in Monday’s early American session but is still inside Friday's trading range. The GBP/USD pair is expected to remain less volatile and will be guided by the market sentiment as the United Kingdom markets are closed on account of Early May.
The GBP/USD strengthens as the US Dollar weakens in the aftermath of United States Nonfarm Payrolls (NFP) and the ISM Services Purchasing Managers Index (PMI) data for April. The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, trades sideways above 105.00.
The overall data indicated that the US economy is losing strength: fewer jobs were added, the Unemployment Rate rose to 3.9%, wage growth slowed, and the ISM Services PMI fell below the 50.0 threshold – the level that separates expansion from contraction – to the lowest reading since December 2022.
Despite the downbeat overall picture presented by Friday’s data, investors didn’t bring forward Federal Reserve (Fed) rate cut bets from September as the ISM Prices Paid subindex for the service sector rose significantly to 59.4 from 53.4 in March. High Prices Paid for service sector inputs renewed fears of inflation remaining higher, which is expected to allow the Fed to emphasize maintaining interest rates restrictive for a longer period. Respondents to the ISM survey said: “Inflation is raising our unit cost on products and services when compared to last year’s expenditures.”
The Pound Sterling trades inside Friday’s trading range during Monday’s European session. The GBP/USD pair formed a Shooting Star candlestick pattern on a daily timeframe on Friday as it reversed its initial gains after the US Services PMI Prices Paid rose significantly. The above-mentioned candlestick is a bearish reversal pattern and its formation near the crucial resistance of 1.2500-1.2600 adds to its strength.
A breakdown of the Shooting Star pattern would trigger if the pair breaks below Friday’s low of 1.2522. The near-term outlook of the Cable is still positive as it is trading above the 20-day Exponential Moving Average (EMA), which trades around 1.2520.
The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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