Pound Sterling weakens against US Dollar with UK Employment in focus

• The Pound Sterling declines against US Dollar as investors await the UK Employment data for the three months ending September.
• The UK Unemployment Rate is estimated to have increased to 4.1%.
• The US Dollar will be influenced by the US inflation data for October.

The Pound Sterling (GBP) drops to near 1.2900 against the US Dollar (USD) in London trading hours on Monday. The GBP/USD pair declines as the US Dollar extends Friday’s recovery and aims to revisit a four-month high. The US Dollar Index (DXY), which gauges Greenback’s value against six major currencies, climbs above 105.30.

The Greenback strengthens on expectations of higher investment and spending in the United States (US) as Republicans look set to take control of both the Senate and the House of Representatives, a scenario that would allow the Trump administration to implement fiscal policies quickly. 

The expected change in government policies, from higher import tariffs to lower taxes, would boost the US fiscal deficit and inflationary pressures, a scenario that could force the Federal Reserve (Fed) to opt for a restrictive policy stance. However, Fed Chair Jerome Powell pushed back expectations of any near-term impact on the monetary policy last Thursday after the central bank cut interest rates by 25 basis points (bps) to 4.50%-4.75%.

This week, a slew of Fed officials are lined up for commentary on Thursday’s interest rate decision and guidance for monetary policy action in the last meeting of this year in December. In addition to Fed speeches, investors will also focus on the US Consumer Price Index (CPI) data for October, which will be published on Wednesday. The CPI report is expected to show that the annual headline inflation accelerated to 2.6% from 2.4% in September, with core figures growing steadily by 3.3%.

Daily digest market movers: Pound Sterling shifts to sidelines ahead of UK labor market data

• The Pound Sterling exhibits a mixed performance against its major peers on Monday, in a calm start of the week as investors keep their powder dry ahead of the United Kingdom (UK) labor market data for the three months ending September, which will be released on Tuesday. The jobs data could significantly influence market expectations for the Bank of England (BoE) monetary policy decision in the December meeting.
• Economists expect that the Unemployment Rate rose to 4.1% in the three months to September from 4.0% in the quarter ending August. Investors will also pay close attention to the Average Earnings data, a key measure of wage growth that drives consumer spending. The growth in earnings has been a major contributor to high inflation in the services sector, which is closely tracked by BoE officials for decision-making on interest rates.
• The Average Earnings Excluding bonuses are expected to have grown by 4.7%, slower than the former reading of 4.9%. Softer wage growth would lift expectations of more interest rate cuts by the BoE as it will suggest a further decline in inflation in the service sector. On the contrary, higher wage growth would do the opposite. Average Earnings including bonuses are estimated to have accelerated to 3.9% from the prior release of 3.8%.
• Last week, the BoE reduced its interest rates by 25 basis points (bps) to 4.75%, as expected. BoE Governor Andrew Bailey signaled a more gradual policy-easing approach and emphasized that the bank is committed to bringing inflation down sustainably to the desired rate of 2%.

Technical Analysis: Pound Sterling trades cautiously near 1.2800

The Pound Sterling trades at a make or a break against the US Dollar near the breakdown region of the rising channel pattern. The near-term trend of GBP/USD remains bearish as the 20-day and 50-day Exponential Moving Average (EMAs) around 1.3000 and 1.3035, respectively, are declining. However, the pair remains well-supported by the 200-day Exponential Moving Average (EMA) around 1.2860.

The 14-day Relative Strength Index (RSI) hovers near 40.00. A bearish momentum would resume if the RSI (14) fails to hold above this level.

Looking down, the August low at 1.2665 will be a major cushion for Pound Sterling bulls. On the upside, the Cable will face resistance near the psychological figure of 1.3000.