Sterling faces pressure on Middle East risks, Fed high rate bets fall

• Sterling struggles to gain ground near 1.3100 against the US dollar as traders cut bets on high Fed rates.
• The US NFP report for September showed a sharp increase in wages and salary growth.
• Rising tensions in the Middle East weigh heavily on risk-sensitive assets.

The British pound (GBP) remains on the back foot near the key 1.3100 level against the US dollar (USD) in the London session on Monday. The GBP/USD pair is under pressure as the US dollar holds on to gains near a near seven-week high, driven by robust growth in the United States (US) Nonfarm Payrolls (NFP) for September released on Friday. The U.S. dollar index ( DXY ), which tracks the greenback against six major currencies, extended its winning streak for a sixth day of trading on Monday to near 102.50.

All components of the US labor market report for September pointed to a resilient economy. Fresh payrolls hit 254,000, the highest level since March, and the unemployment rate fell to 4.1 percent. Average hourly earnings, a key measure of wage growth that is driving consumer spending, rose at a robust 4 percent year-over-year pace.

Surprisingly upbeat labor market data forced traders to back off bets supporting a 50 basis point (bps) rate cut by the Federal Reserve (Fed) in November. According to the CME FedWatch tool, the likelihood of the Fed cutting interest rates by 50 bps has been completely eliminated, and a quarter to one percent rate cut is now widely anticipated.

On Friday, Chicago Fed Bank President Austan Goolsbee called the latest U.S. jobs report “superb.” He added: “If we get more reports like this, I will feel much more confident that we are in fact settling into full employment,” Reuters reported.

Going forward, investors will focus on US consumer price index (CPI) data for September, which will be released on Thursday. Inflation data will provide more clarity on the Fed’s likely interest rate action in November.

Daily Market Reasons: Sterling Underperforms in Bearish Market

• The pound is underperforming its major peers at the start of the week. The British currency is facing pressure on depressed market sentiment due to rising tensions between Iran and Israel in the Middle East region. Israel stepped up strikes in Beirut and its southern suburbs on Sunday after Israeli Prime Minister Benjamin Netanyahu vowed to win.
• Ongoing tensions in the Middle East region have heightened the risks of oil supply chain cuts, leading to a sharp rise in energy prices. This could lead to a greater outflow from oil-importing economies.
• Apart from the cautious market mood, rising expectations of the Bank of England (BoE) to cut interest rates again in November also weighed on the pound sterling. Last week, BoE Governor Andrew Bailey’s comments in an interview with the Guardian newspaper indicated that the central bank may be slightly more aggressive in its approach to cutting interest rates if inflationary pressures continue to ease.
• On the contrary, the BoE’s chief economist, Huw Pill, advised cutting interest rates gradually in his speech to the Institute of Chartered Accountants in England and Wales on Friday. Pill said: “While further bank rate cuts remain on the horizon should the economic and inflationary outlook develop broadly as expected, it will be important to guard against the risk of cutting rates either too much or too quickly. “
• This week, the major trigger for the pound will be monthly gross domestic product (GDP) and factory data for August due out on Friday.

Technical Analysis: Sterling Oscillates Friday Range

Sterling is trading mid-range on Friday as investors focus on US CPI data for September. GBP/USD is expected to remain on the back foot as it struggles to hold the 50-day exponential moving average (EMA), which is trading around 1.3110. Cable is on a run or break near the uptrend line from the December 28, 2023 high of 1.2827.

The 14-day Relative Strength Index (RSI) is falling in the 40.00-60.00 range, suggesting a loss of bullish momentum. However, the uptrend remains intact.

Looking to the upside, the 20-day EMA near 1.3234 will be a major roadblock for GBP bulls. On the downside, the pair would find support near the psychological figure of 1.3000.