Sterling struggles for firm ground as US NFP takes center stage

• Sterling finds temporary support near 1.3100 against the US dollar as the greenback corrects slightly.
• Investors see the Fed cutting interest rates this month, but are divided on the size of the potential rate cut.
• The BoE’s policy easing cycle is expected to be shallow for the rest of the year.

The British pound (GBP) is trying to find a firm base near the support at the 1.3100 round level in the London session on Wednesday. The GBP/USD pair is struggling to gain bids as market sentiment sours amid growing uncertainty ahead of the United States (US) Nonfarm Payrolls (NFP) data for August due out on Friday.

S&P 500 futures continued to fall in European trading hours after a lower Tuesday, showing a sharp decline in risk appetite among market participants. The US Dollar Index (DXY), which tracks the greenback against six major currencies, is correcting marginally to near 101.60.

Official labor market data will influence market speculation on the size of the Federal Reserve (Fed) interest rate cut in September. Markets are fully pricing in the Fed’s pivot to policy normalization this month, but traders remain divided on whether the central bank will start its policy easing cycle aggressively with a big rate cut or more gradually.

If the US NFP data indicates a further slowdown in job demand and a rise in unemployment, market expectations for the Fed to cut its key lending rates by 50 basis points (bps) would rise sharply. In a speech at the latest symposium in Jackson Hole (JH), Fed Chairman Jerome Powell promised to support the labor market if it continues to deteriorate. Conversely, flat or better-than-projected jobs data would dampen expectations of a big rate cut.

In Wednesday’s session, investors will focus on US JOLTS job offers data for July and the Fed’s Beige Book, which will be released at 14:00 GMT and 18:00 GMT, respectively. Economists expect U.S. employers to have posted 8.1 million job vacancies, down slightly from 8.184 million in June.

Daily market reasons: Sterling remains bearish amid absence of top UK economic data

• The pound is underperforming its major peers on Wednesday. The British currency is struggling to gain strength despite growing speculation that the Bank of England’s (BoE) policy easing cycle will be shallow for the rest of this year compared with that of its central banks peers.
• According to money market price data, the BoE is expected to cut interest rates by 40 basis points in the remaining year, while the European Central Bank (ECB) will cut by 65 basis points, Reuters reported. Over the same time frame, the Fed is expected to cut its key lending rates by 100 bps, according to CME’s FedWatch tool.
• An improvement in the economic outlook in the United Kingdom (UK) and a slower decline in services inflation supported expectations that the BoE would opt for a gradual policy easing cycle. The UK economy is expected to perform better than initially anticipated due to an expansion in the manufacturing sector as well as the services sector.
• The final estimate for the S&P Global/CIPS Composite PMI was 53.8 in August, higher than the preliminary release of 53.4. The indicator suggests the economy grew at its fastest pace since April.

Technical Analysis: Sterling is trying to gain ground near 1.3100

Sterling is rising from a new weekly low of around 1.3090 against the US dollar. However, the GBP/USD pair is struggling to gain a firm position near the round level support of 1.3200. The cable may find buying interest near the breakout region of an uptrend line drawn from the December 28, 2023 high of 1.2828 on a daily time frame.

The 14-day Relative Strength Index (RSI) is falling to near 60.00 after breaking out of overbought conditions, signaling a lack of bullish momentum.

However, short- and long-term upward-sloping exponential moving averages (EMAs) suggest a strong uptrend.

If the bullish momentum resumes, the cable is expected to rally towards the psychological resistance of 1.3500 and the February 4, 2022 high of 1.3640, after breaking a new two-and-a-half-year high of 1.3266. On the downside, the psychological level of 1.3000 will be the crucial support for the GBP bulls.