In the European trading session on Friday, Pound Sterling, the United Kingdom’s official currency, corrected slightly against the US Dollar. Traders anxiously tracked this shift as it unfolded. The currency, called GBP, dropped to just above 1.3550 per US dollar. This decline came after a high of 1.3620, which it reached only the day before. The drop comes right before the otherwise largest and most awaited release, the United States Non-Farm Payroll (NFP) data release. This data intense week will be critical in determining market sentiment tone.
Dating all the way back to 886 AD, the Pound Sterling holds the title as the oldest currency in use in the world. It holds an important position in the international economic system as a whole. In fact, it is the fourth most traded currency by value for foreign exchange (FX) transactions. In 2022, Pound Sterling accounted for less than 12% of all foreign exchange transactions. Second, it had a huge average daily transaction value of almost $630 billion.
Pound Sterling’s Performance Against Major Currencies
Over the past few trading days, Pound Sterling has shown remarkable strength. It has remained well above major support levels formed off of its September 26 high of 1.3434. Further confirming the bullish trend, the 20-day Exponential Moving Average (EMA) is bullish, sloping higher at 1.3443. At the same time, the 14-day Relative Strength Index (RSI) hovers around 60.00, indicating that bullish momentum is still strong.
Pound Sterling has underperformed against most major currencies, with the exception of the Japanese Yen (JPY). This steep drop-off poses some fundamental questions. Can the currency hold on to its new-found strength given mixed economic data and uncertain geopolitical trends?
The main currency trading pairs for Pound Sterling are GBP/USD, GBP/JPY, and EUR/GBP. The GBP/USD pairing, sometimes known as the “Cable” market, makes up 11% of all FX trades. Traders mostly use it as a general barometer to measure the health of the UK’s economy. The GBP/JPY cross, or “Dragon” as it is often called, represents around 3% of all FX transactions. By contrast the EUR/GBP cross makes up 2%.
Economic Context and Market Sentiment
Market analysts blame a cocktail of economic factors for the recent turmoil over Pound Sterling. Inflationary pressures and prospects for continued employment growth are two of the main driving factors. Speaking to this larger economic picture, Fed Governor Adriana D. Kugler said just a few weeks ago,
“I see greater upside risks to inflation and potential downside risks to employment and output growth.”
Inherent in these comments is a fear of economic disruption or downturn. Here’s how they could benefit the US and UK economies in the short term.
With traders and investors awaiting the release of very important NFP data from the US, sentiment is cautious. The NFP report is expected to provide insights into employment trends and overall economic health, which could further impact currency valuations.
Future Outlook for Pound Sterling
Looking forward, the direction that Pound Sterling takes is heavily contingent on forthcoming economic data releases and central bank actions. As inflation pressures build worldwide, market participants will be eager to see how these developments affect domestic interest rate policies and currency values.
Despite its recent slip against the US Dollar, analysts believe there is potential for recovery if economic indicators align positively. The current bullish momentum shown on the RSI might pave the way for more upward movement if the market continues to be friendly.