STORY LINK Pound Sterling Today: GBP/EUR, GBP/USD Slide on Dovish BoE Bailey Rhetoric

The pound dipped sharply in Asian trading on Thursday following a media interview by Bank of England Governor Bailey.

Bailey hinted at a faster rate of interest rate cuts and, in response, the Pound to Euro (GBP/EUR) exchange rate sliding to 1.1905 from just above 1.20.

The Euro-Zone PMI services-sector business confidence index was revised higher to 51.4 from the flash reading of 50.5 which also had some positive Euro impact.

Stronger expectations of an ECB rate cut this month should, however, offer significant Pound protection.

In a wide-ranging interview, Bank of England Governor Bailey expressed concerns over developments in the Middle East and the risk of a spike in oil prices.

Bailey said he was encouraged by the fact that cost of living pressures had not been as persistent as the Bank thought they might be. He said if the news on inflation continued to be good there was a chance of the Bank becoming more “a bit more activist” in its approach to cutting interest rates, now at 5.0%.

Markets have fully priced in a November rate cut and expect rates to decline to 3.75% by the middle of next year.

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MUFG commented; We altered our view on the BoE to assume back-to-back rate cuts before year-end given our view that the economy was now showing clearer evidence of decelerating economic growth.”

The bank quoted recent evidence on the economy; “Sentiment indicators are now turning lower – the GfK consumer confidence index, the PMIs, the CBI Orders index, the Lloyds Business Barometer have turned lower pointing to weaker growth and the potential for a further softening in underlying inflation.”

MUFG also considered the global outlook; “With the Fed and ECB also likely cutting at back-to-back meetings before year-end the damage for the pound should not be considerable. Still, long GBP has been a popular and fruitful trade this year and there is a risk of a downside correction especially if financial market volatility was to pick-up on increased risk aversion.”

On Wednesday, ECB council member Schnabel commented that a “Return to 2% target in a timely manner is becoming more and more likely despite elevated services inflation and strong wage growth.”

She added that; “Signs of softening labor demand and progress in disinflation suggest inflation could sustainably fall back to the 2% target.”

She did note that elevated services inflation and strong wage growth persist, but added; “We cannot ignore the headwinds to growth.”

According to ING; “This could be a sign that the hawks are throwing the towel on the October debate, and will accept another cut after the lower-than-expected CPI figures earlier this week.

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TAGS: Pound Sterling Forecasts

• GBP/USD trades in positive territory above 1.3150 early Friday.
• The technical outlook suggests that the recent rebound is a technical correction.
• Investors await September Nonfarm Payrolls data from the US.

After losing more than 1% on Thursday, GBP/USD stages a rebound and trades in positive territory above 1.3150 in the European session on Friday. The pair’s technical picture highlights that the bearish bias remains intact as market focus shifts to the US labor market data.

Dovish comments from Bank of England (BoE) Governor Andrew Bailey triggered a Pound Sterling selloff early Thursday. In the second half of the day, the US Dollar (USD) preserved its strength and didn’t allow GBP/USD to stage a rebound after the September ISM Services PMI came in at 54.9, surpassing the market expectation of 51.7.

In the European morning on Friday, BoE Chief Economist Huw Pill adopted a more cautious tone regarding further policy easing and helped Pound Sterling find support. “Further cuts in the bank rate remain in prospect but it will be important to guard against the risk of cutting rates either too far or too fast,” Pill said.

Later in the session, the US Bureau of Labor Statistics will publish employment figures for September. Nonfarm Payrolls (NFP) are forecast to rise by 140,000 and the Unemployment Rate is expected to stay unchanged at 4.2%.

A stronger-than-forecast growth in NFP could make it difficult for GBP/USD to extend its recovery in the second half of the day. On the flip side, a disappointing reading could have the opposite impact on the pair’s action, opening the door for another leg higher heading into the weekend.

GBP/USD Technical Analysis

The Relative Strength Index stays below 50 after rebounding from below-20, suggesting that GBP/USD is in a correction phase rather than in the beginning of a reversal. On the upside, the 200-period Simple Moving Average (SMA) aligns as first resistance at 1.3200 before 1.3225 (Fibonacci 50% retracement of the latest uptrend) and 1.3260 (100-period SMA).

Looking south, first support could be spotted at 1.3100 (Fibonacci 78.6% retracement) ahead of 1.3050 (static level) and 1.3000 (static level).

• The yen strengthened slightly on Friday but was heading for an over 2.5% weekly loss.

• Consensus estimates indicate a 148,000 increase in US employment for September. 

• Japan’s Prime Minister Ishiba has dashed hopes for a near-term rate hike. 

The USD/JPY outlook shows a pause near recent peaks ahead of crucial US monthly employment figures. The dollar hovers near a six-week high due to support from a slightly hawkish Fed, upbeat data and Middle East tensions. On the other hand, the yen strengthened slightly on Friday but was heading for an over 2.5% weekly loss.

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Market participants are preparing to receive the US nonfarm payrolls that will give clues on Fed policy. Consensus estimates indicate a 148,000 increase in employment for September. Meanwhile, the unemployment rate will likely remain at 4.2%. Recent US data has shown unexpected resilience in the economy. 

If this trend continues, the NFP could beat expectations. An upbeat report would lower bets for a 50-bps rate cut. However, if employment falls sharply, the Fed would be forced to consider another massive cut in November. Notably, Powell recently noted that the Fed might cut twice this year by 25-bps each. The employment figures could change this outlook.

Meanwhile, data on Thursday showed better-than-expected business activity in the services sector, indicating a strong economy. Meanwhile, the dollar remained near its week-highs as Middle East tensions spooked traders. The war in the Middle East has widened to involve Iran and Lebanon. Iran made a bold attack on Israel, which could lead to retaliation.

In Japan, the new Prime Minister Ishiba has dashed hopes for a near-term rate hike. He said the economy was not ready for more rate hikes. Still, economists forecast at least one such move this year.

USD/JPY key events today

• US average hourly earnings m/m
• US nonfarm employment change
• US unemployment rate

USD/JPY technical outlook: Rally halts near 147.01 resistance

On the technical side, the USD/JPY price has retreated after finding solid resistance at the 147.01 level. However, the bullish bias is still strong, with the price far above the 30-SMA and the RSI in bullish territory. 

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Furthermore, the price trades within a bullish channel with clear support and resistance lines. Bulls recently touched the channel resistance, where bears were waiting to take over. Still, if bulls remain strong, the price will keep climbing to break above 147.01. Otherwise, it will drop to revisit the channel support.

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Pound Sterling will come under further pressure against the Dollar if today’s U.S. marquee job report comes in strong.

The Pound to Dollar exchange rate (GBP/USD) will register its biggest weekly loss since July 2023 if Friday’s all-important U.S. jobs report beats expectations.

If U.S. non-farm payrolls come in stronger than the market is expecting (140K) the Dollar’s rebound will gather steam as investors will fade expectations for another 50 basis point interest rate cut from the Federal Reserve before year-end.

“We believe that the USD will follow the path of US rates and UST yields in the wake of the release. In particular, any positive data surprises could encourage rates investors to pare back their Fed rate cut expectations and thus give the USD’s relative rate appeal a boost across the board,” says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

Divergence in U.S. and UK interest rate expectations is the theme of the week: GBP/USD fell 1.10% on Thursday after the Bank of England’s Governor, Andrew Bailey, hinted that the Bank might accelerate the pace at which it cuts the UK’s base rate.

U.S. rate expectations are meanwhile heading in the opposite direction. The GBP/USD selloff was fuelled later in the day following the release of an above-consensus U.S. ISM non-manufacturing PMI. The data showed America’s service sector expanded again in September, while price pressures rose, which is inconsistent with a rapid reduction in interest rates.

A bad week for Sterling ‘bulls’ could be about to get worse if the jobs report accentuates the divergence in prospects for UK and U.S. interest rates.

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“Today’s data could attract considerable attention given that the September and October NFP could decide whether the FOMC delivers another jumbo rate cut on 7 November,” says Marinov.

Marinov says the Dollar’s rally could be “pronounced” if stock markets baulk at a stronger-than-forecast jobs report.

“To the extent that any resultant tightening of US financial conditions is made worse by weaker risk sentiment on the back of escalating geopolitical tensions, the USD gains could be particularly pronounced vs risk-correlated currencies,” he says.

Of course, there is the chance the labour market comes in soft, and Crédit Agricole thinks any downside surprises could hurt the USD’s appeal, especially if investors start pricing a jumbo cut in November.

If this is the case, Pound-Dollar will pare back the week’s losses to less than 1.0%.

Short-term Forecast for USD/JPY

USD/JPY trends will likely hinge on BoJ monetary policy chatter and the US Jobs Report. Dovish signals from the BoJ and the Japanese government could weigh on Yen demand. Moreover, upbeat US labor market data could dampen expectations of a marked narrowing in the interest rate differential between the US and Japan. The shift in sentiment may drive the USD/JPY toward 147.5.

Traders should stay vigilant as Friday’s data and monetary policy chatter will impact trading USD/JPY strategies. Monitor real-time data, central bank views, and expert commentary to adjust your trading strategies accordingly. Stay ahead of the market with our expert insights.

USD/JPY Technical Analysis

Daily Chart

The USD/JPY remains above the 50-day EMA while hovering below the 200-day EMA, affirming bullish near-term but bearish longer-term price signals.

A USD/JPY break above 147.5 could signal a move toward the 148.529 resistance level. Furthermore, a breakout from the 148.529 resistance level may give the bulls a run at the 200-day EMA.

Monetary policy commentary and the US Jobs Report require consideration.

Conversely, a drop below the 50-day EMA and the 145.891 support level could signal a fall toward the 143.495 support level.

The 14-day RSI at 59.46 indicates a USD/JPY move to the 200-day EMA before entering overbought territory.

Created on October 03, 2024

• The US dollar has recently rebounded amid risk-off sentiment fuelled by geopolitical tensions, particularly in the Middle East, causing the GBP/USD currency pair to lose much of its recent gains.
• The pair has retreated to the support level of 1.3199 at the time of writing this analysis.
• Its gains until last week were the highest since February 2022, when it jumped to the brink of resistance at 1.3440.

According to Forex market trading, the US dollar is in demand at the beginning of the new month and the last quarter of 2024, helped by the latest guidance from Federal Reserve Chairman Jerome Powell on interest rates. Powell indicated on Monday that the Federal Reserve expects to implement two more US interest rate cuts by the end of 2024, which is less than what the market currently expects.

Prior to Powell’s comments, the market was pricing in as much as 70 basis points of rate cuts over the rest of the year, which would require at least another 50 basis points cut and another 25 basis points move. However, this new guidance from the Chair suggests that the markets will be better positioned with the expectation of two additional 25 basis point moves. In this regard, Francesco Pesole, a forex market analyst at ING Bank, said: “Powell explicitly rejected a 50-basis point rate cut by the end of the year.”

Overall, financial markets have become more bullish in their belief that the Federal Reserve will rapidly cut US interest rates, which would boost the US economy, lower bond yields, and put downward pressure on the dollar. The analyst explains, “Powell said that the baseline scenario is two 25 basis point moves by the end of the year, which is an unusually specific guidance indicating his dissatisfaction with the market’s hawkish pricing.”

Analysts at Goldman Sachs say the US economy continues to produce “relatively strong activity data” and “recent Labor market news has been relatively encouraging.”

Because of this, Kamakshya Trivedi, a forex market analyst at Goldman Sachs, says, “The recent tendency to sell the dollar on all types of news seems unsustainable.” However, Powell’s message is not entirely clear-cut, and it’s not unusual for markets to debate a 25-basis point rate cut given the broader evidence pointing to a larger interest rate cut in the coming months.

Given this, the comments are not a turnaround for the weakening US dollar and the path of least resistance for GBP/USD remains higher, albeit at a slower pace likely with deeper declines along the way. Overall, Friday’s US Labor market report will be important in this regard, as a higher-than-consensus reading will begin to give the impression that the Fed will have to go slow on rate cuts.

If this view becomes more entrenched, a period of GBP/USD weakness could follow.

Technical forecasts for the GPB/USD pair today:

Based on the performance on the daily chart below, GBP/USD has broken the support level of 1.3160, which is a clear break of the uptrend. As we mentioned before, stability below this level could prompt bears to move quickly to the psychological support level of 1.3000. Especially, if the US jobs numbers come out stronger than expected tomorrow Friday. On the other hand, and in the same time frame, the pair’s return to the resistance level of 1.3350 would be a strong impetus for further bull control again. 

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The US dollar has strengthened for a fourth consecutive day, sending the EUR/USD down for the fifth session.

The short-term EUR/USD technical forecast has turned bearish ever since breaking its trend line and 21-day moving average this week.

The EUR/USD is now nearing the lower end of its recent range around 1.1000 area after falling through a few short-term support levels this week, including the area between 1.1100 to 1.1125.

This 1.1100-1.1125 zone is now the most important hurdle to watch should we get any upside moves this week, say as a result of weaker US data. Only a closing break above this zone would be a positive technical development.

On the downside, if support around the 1.1000-1.1030 area breaks, and we hold below this region, then that could pave the way for a potential drop towards the next important technical area circa 1.0900.

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The greenback has been bolstered by several reasons.

At the start of the week, it was Fed Chair Powell’s hawkish remarks that provided the greenback a lift.

Then we had a couple of stronger-than-expected labour market indicators, which reduced the likelihood of another 50 basis point rate cut this year. We have also seen weakness come into a couple of major foreign currencies.

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On Wednesday, the yen slumped after Japanese Prime Minister Shigeru Ishiba said he does not “believe that we are in an environment that would require us to raise interest rates further,” following a meeting with Bank of Japan Governor Kazuo Ueda.

Today, it was the Bank of England Governor that sent the pound slumping after saying that the UK central bank could be a “bit more aggressive” in cutting interest rates, provided the news on inflation continued to be good.

Adding to the dollar’s momentum has been the ongoing Middle East conflict, which has driven up geopolitical risks and undermining the EUR/USD forecast and risk-sensitive currencies across the board.

This newly found momentum means the greenback is likely to remain supported on the dips until the release of the US jobs report on Friday, which could set the tone for its near-term direction before attention shifts to the US presidential election.

Tensions in the Middle East have played a significant role in the dollar’s recent performance. The latest missile exchange between Israel and Iran has left traders watching closely for Israel’s next move.

Any major retaliation could shake markets further. Israel has vowed to respond while intensifying its ground operations in Lebanon. However, there’s also the possibility of de-escalation.

Should Israel opt for a more restrained response, avoiding key sites like Iran’s nuclear facilities, markets may calm down, stabilising the euro and other risk-sensitive currencies.

But if the conflict escalates, the EUR/USD forecast could see even greater headwinds as risk-aversion grows.

• EUR/GBP is undergoing a short squeeze higher. 
• The upside will likely be capped at the cluster of Moving Averages situated in the 0.8450s.

EUR/GBP has suddenly reversed and shot higher on Thursday, gaining over 1.0% on the day so far. The explosive rally suggests a short squeeze is happening, and the short-term trend has reversed “on a dime”. The bulls are now back in control.  

EUR/GBP Daily Chart 

EUR/GBP will probably go higher. The next key resistance level lies at the cluster of Moving Averages in the 0.8450s. From there, a temporary pullback is likely, given the speed of the ascent. Any corrections will likely encounter support at around 0.8385, the July lows. 

One warning of the sudden reversal came from the fact that the Relative Strength Index (RSI) was converging bullishly with price (red dashed lines on the chart). This signified a lack of downside momentum and increased chances of a pullback.  

Another warning sign was that EUR/GBP has already reached the conservative target for the bear move that began at the August 5 high, at 0.8322. This raised the possibility that the whole move might have completely run its course, which appears to be the case given today’s price action. 

Gold prices dropped as stronger U.S. economic data tempered expectations of a significant interest rate cut by the Federal Reserve in November. The market is now pricing in a 34% chance of a 50-basis-point cut, down from 49% last week, according to CME’s FedWatch tool. Richmond Federal Reserve President Thomas Barkin noted that inflation might remain above the 2% target for longer, limiting aggressive rate cuts.

Despite the decline, gold remains near its record high of $2,685.64, supported by geopolitical tension in the Middle East. U.S.-Israel tensions intensified after Iran’s missile attack on Israel, adding safe-haven demand for gold. However, the possibility of a less aggressive rate cut continues to limit upside momentum.

Investors are awaiting the U.S. non-farm payrolls report, scheduled for Friday. A weaker-than-expected jobs print could drive gold prices higher, with potential to test the $2,700 mark.

Treasury Yields Rise as Focus Shifts to Labor Market Data

U.S. Treasury yields rose on Thursday as investors shifted focus to labor market data, with the yield on the 10-year Treasury increasing by more than 2 basis points to 3.813%. The 2-year Treasury yield also rose to 3.674%. Private payrolls data from ADP revealed stronger-than-expected growth, with private employers adding 143,000 jobs in September, surpassing expectations of 128,000.

The labor market strength puts more pressure on the Federal Reserve’s interest rate decisions. Friday’s non-farm payrolls report will play a key role in shaping expectations for further monetary policy moves, particularly the potential for rate cuts.

Currencies: Safe-Haven Dollar Gains as Sterling and Yen Weaken

The U.S. dollar strengthened across the board as geopolitical tensions and stronger economic data supported demand. Safe-haven buying increased following Iran’s missile attack on Israel, while better-than-expected U.S. private payrolls data pushed expectations for a robust non-farm payrolls report on Friday.

Created on October 03, 2024

• The Japanese yen depreciated to around 147.20 yen against the US dollar today, Thursday, hitting a month-low after new Japanese Prime Minister Shigeru Ishiba stated that it was still too early to raise interest rates following his meeting with Bank of Japan Governor Kazuo Ueda.
• He said that current economic conditions do not necessitate further interest rate hikes, prompting financial markets to postpone expectations of another rate hike.

The newly appointed Minister of Economy expressed similar sentiments, calling on the Bank of Japan to be cautious about raising interest rates again. On the economic data front, the final reading showed that business activity in Japan remained expansionary for the eighth consecutive month in September amid strong demand. Also, the yen weakened against the US dollar as stronger-than-expected US private employment data supported the view that the Federal Reserve does not need to cut interest rates significantly.

On the stock trading platform front, Japanese stocks rise as the yen weakens. The Nikkei 225 index rose 2% to above 38,500 points, while the broader TOPIX index jumped 1.5% to 2,690 points on Thursday, as the yen fell to a one-month low, boosting shares of Japanese export-heavy companies.

According to reliable trading platforms, the yen weakened after new Prime Minister Shigeru Ishiba said it was too early to raise interest rates further following his meeting with Bank of Japan Governor Kazuo Ueda. Also, Benchmark indices recovered from sharp selling in the previous session, driven by escalating geopolitical tensions in the Middle East. Meanwhile, final data showed that business activity in Japan remained expansionary for the eighth consecutive month in September amid strong demand. As a result, technology stocks led the rally, with strong gains from Lasertec (4.5%), Disco Corp (5.5%), Tokyo Electron (3.1%), SoftBank Group (2.9%), and Advantest (3.8%). Other heavyweight stocks in the index also recorded gains, including Toyota Motor (2.2%), Fast Retailing (2.9%), and Nippon Yusen (4.6%).

USD/JPY Technical analysis and Expectations Today:

The recent move of the USD/JPY pair demonstrates the strength of our recommendations to buy the pair from any downward level when it dipped towards the psychological level of 140.00. We mentioned at the time that the yen’s gains might not last long, as the Bank of Japan’s shift towards tightening remains cautious. The recent gains, and potentially moving towards resistance at 148.80 and then the psychological resistance of 150.00, represent a significant shift in the overall trend to bullish, according to the daily chart performance. Furthermore, the USD/JPY pair will remain within its current range with an upward bias until reacting to the announcement of US jobs figures tomorrow, which will have a strong and significant impact on the future of market expectations regarding the fate of US interest rates. 

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