Pound Sterling struggles against US Dollar as UK labor market risks linger

The Pound Sterling gives back its early gains against the US Dollar.
Upbeat UK Retail Sales and flash S&P Global PMI data fail to support the Pound Sterling.
US President Trump expresses confidence in reaching a trade deal with China.

The Pound Sterling (GBP) gives up early gains against the US Dollar (USD) on Monday, flattening at around 1.3310 during the European trading session and on track to extend its losing streak for a seventh trading day. The GBP/USD pair falls as investors seem to see the glass half-empty regarding the state of the United Kingdom (UK) economy, with labor market concerns outweighing upbeat Retail Sales and positive flash S&P Global Purchasing Managers’ Index (PMI) data released on Friday.

The Office for National Statistics (ONS) reported that Retail Sales, a key measure of consumer spending, surprisingly rose by 0.5% on a monthly basis, while these were expected to decline by 0.2%. Also, UK’s private sector business activity expanded at a faster pace due to a strong rebound in the manufacturing sector. The Manufacturing PMI rose to 49.6 from estimates of 46.6. Still, despite the increase, the data continued to suggest a contraction in factory activity as the figure remained below the 50.0 threshold. The overall composite PMI, however, increased to 51.1..

Upbeat consumer spending and business activity growth should provide some relief to Bank of England (BoE) officials, who are worried about slowing job demand. However, the report also showed that jobs continue to be cut amid a backdrop of business confidence that remains subdued by historical standards.

In mid-October, traders raised BoE dovish bets after the release of weak employment data for the three months ending in August. The labor market report showed that the ILO Unemployment Rate rose to 4.8%, the highest rate since mid-2021.

Daily digest market movers: Pound Sterling gives up early gains against US Dollar

The Pound Sterling surrenders early gains against the US Dollar, even as the latter trades cautiously in the wake of intensified speculation that the Federal Reserve (Fed) will cut interest rates in the monetary policy announcement on Wednesday.
According to the CME FedWatch tool, traders have almost priced in a 25-basis-point (bps) reduction in interest rates to 3.75%-4.00%. This would be the second straight interest-rate cut by the Fed.
Meanwhile, slowing US inflation has also provided room for the Fed to focus more on improving job demand. The Consumer Price Index (CPI) report for September showed on Friday that monthly headline and core inflation – which excludes volatile food and energy items – rose at a moderate pace of 0.3% and 0.2%, respectively.
On the global front, accelerating hopes of a trade deal between the US and China are providing support to the US Dollar. US President Donald Trump has expressed confidence, during Monday's Asian trading session, that Washington and Beijing will reach a deal after his meeting with Chinese leader Xi Jinping later this week. “I think we'll come away with a deal from Xi meeting,” Trump said.
Earlier, US Treasury Secretary Scott Bessent also signaled that Washington and Beijing will reach a deal soon after his meeting with Chinese Vice Premier He Lifeng at the sidelines of the Association of Southeast Asian Nations (ASEAN) summit in Malaysia over the weekend. Bessent stated that 100% additional tariffs imposed on Beijing won’t proceed, and export controls by them on rare earth minerals would be deferred.

Technical Analysis: Pound Sterling struggles to hold 1.3300

The Pound Sterling struggles to gain ground against the US Dollar near the 12-day low around 1.3310 on Monday. The overall trend of the GBP/USD pair is uncertain as it wobbles near the 200-day Exponential Moving Average (EMA), which trades around 1.3300.

The 14-day Relative Strength Index (RSI) stays near 40.00. A fresh bearish momentum would emerge if the RSI drops below that level.

Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the psychological level of 1.3500 will act as a key barrier.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.