Sterling gains with US NFP on horizon

• Sterling reaches near 1.3160 ​​against the US dollar ahead of September US NFP report.
• The likelihood that the Fed will cut interest rates by another 75 bps by the end of the year has fallen significantly.
• The BoE’s Bailey stressed the need to cut interest rates aggressively.

The British pound (GBP) is finding buying interest near support at the 1.3100 round level against the US dollar (USD) in the London session on Friday. GBP/USD is moving higher to 1.3160 ​​after a three-day losing streak. However, the near-term outlook for the pair is uncertain, with investors focusing on the September United States (US) Non-Farm Payrolls (NFP) report due at 12:30 GMT.

Market participants will be paying close attention to the US NFP data as it will provide new clues about the current health of the US labor market. The US Federal Reserve (Fed) kicked off its policy easing cycle with a larger-than-usual 50 basis point (bps) interest rate cut in September, as officials sought to revive labor market strength amid easing pressures prices.

Official employment data is expected to show that US employers hired 140,000 job seekers, down slightly from August’s figure of 142,000. The unemployment rate is estimated to have remained steady at 4.2%.

Investors will also pay close attention to data on average hourly earnings, a key measure of wage inflation that influences consumer spending, which is expected to have risen a steady 3.8% year-over-year. The measure of monthly wage growth is seen rising 0.3%, slower than 0.4% in August.

Labor market data will significantly influence the Fed’s monetary policy action for the remaining two meetings this year. According to the CME FedWatch tool, the likelihood that the Fed will cut interest rates by another 75 basis points (bps) by the end of the year fell to 55% from 79% a week ago.

Daily Market Reasons: Sterling Outperforms Mainstream

• The pound is outperforming its major peers on Friday. However, it is expected to face pressure due to tensions between Iran and Israel that escalated into full-fledged war after the assassination of Hezbollah leader Hassan Nasrallah. Oil prices rose amid tensions in the Middle East. Historically, a sharp rise in energy prices hurts the currencies of those economies that rely heavily on imported oil, as it results in higher external outflows for them.
• On top of that, BoE Governor Andrew Bailey’s comment on Thursday’s interest rate outlook also dampened Sterling’s outlook. Baily’s comments in an interview with the Guardian newspaper appeared conciliatory as he stressed the need to cut interest rates aggressively if price pressures continue to ease.
• Bailey said the BoE could become “a little more activist” and “a little more aggressive” in its approach to cutting interest rates if there is further welcome inflation news for the central bank, Reuters reported.
• On the economic front, the revised S&P Global/CIPS Construction PMI estimate rose sharply to 57.2 unexpectedly. The construction PMI, which measures activity in the construction sector, was expected to have expanded at a slower pace to 53.1 from preliminary estimates of 53.6.

Technical analysis: Sterling finds cushion near 50-day EMA

Sterling is finding temporary support near the 50-day exponential moving average (EMA), which is around 1.3115 against the US dollar. GBP/USD is gaining ground after a sharp correction to near 1.3090 on Thursday from a more than two-year high of 1.3430 on 26 September.

The 14-day Relative Strength Index (RSI) is falling in the 40.00-60.00 range, suggesting weakening momentum.

More downside could pull the cable towards the trendline around 1.3060 represented by the December 28, 2023 high of 1.2828. The pair made a sudden upward move after a break of this line on August 21. Looking to the upside, the 20-day EMA near 1.3234 will be a major roadblock for GBP bulls.