The Brexit news came as Pound Sterling suffered one of its largest declines on Tuesday. During the European trading session, it had declined to about 1.3130 against the US Dollar. This plummet is no symbolic gesture; it’s a big deal for the UK’s beloved pound. That’s the first time the net overall labor force has shrunk since the three months ending in March 2024. The labor market is worsening, and this has raised alarm bells for macroeconomists and market-watchers alike. They forecast weaker economic growth for the UK.
This week’s employment data has added a lot of selling pressure on the Pound Sterling. Not yet recessing Economists are expecting very weak GDP growth for the UK in the third quarter, with forecasts of a mere 0.2% rise. That’s an underwhelming dip from the 0.3% growth in the last quarter. This slowdown only intensifies the developing concerns around the overall health of the UK economy. In response, traders and investors are gravitating towards a safe haven in the currency market.
Employment Data and Market Reaction
For example, on Tuesday, the release of some weaker than expected UK employment data triggered a sell-off of the Pound Sterling. Turning to the statistics, Average Hourly Earnings Excluding Bonuses are up 4.6% annualized. Good thing too, this increase only happened at a subpar clip, mirroring lackluster growth in earnings. Average Earnings Including Bonuses fails to deliver, raising just 4.8%. That’s under the projected 4.9% and a drop from the last release of 5%.
Consequently, Pound Sterling experienced intense selling pressure. The trend overall is still very much bearish, the currency is trading under the 200-period Exponential Moving Average (EMA) at about 1.3264. With employee numbers in decline and wage growth stagnant, there are fears over UK consumer spending. We know that this continued decline places our country’s long-term economic stability in jeopardy.
According to market analysts, the Pound Sterling is at a critical forking point. In order to regain bullish impetus, it has to clear the October 28 high above 1.3370. The central bank tried to establish dovish expectations for its December meeting just last week. Yet, by dropping “careful” from its “gradual monetary easing guidance,” it has introduced even greater uncertainty. This latest shift is a sign that the Bank of England (BoE) is becoming more dovish. This could lead to increased volatility in currency markets.
Technical Indicators and Future Outlook
Technical analysis indicates that the Pound Sterling is at a difficult juncture in terms of recovering lost downside momentum. The 14-day Relative Strength Index (RSI) is still floating near the 40.00 level suggesting that there are no buyers pushing this market higher. This technical indicator is a sign that the market has completely lost faith in support for the currency. As a result, it is hampered from increasing in the near future.
Further, the April lows just under 1.2700 are marked as a key support area for the GBP. If it isn’t able to maintain itself above this threshold, experts caution that more drops may be in the future. The currency’s performance against other major pairs, such as GBP/JPY and EUR/GBP, will play a significant role in determining its trajectory going forward.
The Pound Sterling is on the rocks and shaky ground. It’s worth taking a moment to consider what this means for its position in the increasingly competitive global foreign exchange market. The currency is the fourth most traded currency in the world. It comprises just over 12% of all transactions, but on a daily basis, averages an extraordinary $630 billion each day according to 2022 data. Its most important trading pairs are GBP/USD, nicknamed ‘Cable’, GBP/JPY, named as ‘Dragon’ or ‘Agent’, and EUR/GBP.
Global Economic Context
Against the wider backdrop of global economic uncertainty, the US Dollar Index (DXY) is holding steady, trading flat around 99.60. The continued strength of the US Dollar makes the situation even tougher for the Pound Sterling. Investors are realizing this and are carefully watching economic signals from Europe and the U.S.
The market’s reaction to ongoing geopolitical developments and domestic economic policies will influence how currencies perform against one another in the upcoming weeks. Financial analysts have a keen eye on these drivers. For now, uncertainty looms over the sustainability of Pound Sterling’s existing bearish trend.