British pound eyes US nonfarm payrolls

• US nonfarm employment expected to fall sharply

The British pound has posted strong gains on Thursday. In the European session, GBP/USD is trading at 1.2222, up 0.16%.

US nonfarm payrolls expected to decline

The week wraps up with the US nonfarm employment report. This key event has been overshadowed by CPI releases in the era of high inflation but is still a critical gauge of the strength of the US economy. In September, nonfarm payrolls blew past expectations with a gain of 336,000. The markets are expecting a much softer reading in October, with a market consensus of 170,000.

The ADP Employment Change report, which isn’t considered a reliable gauge for nonfarm payrolls but is still closely watched, posted a weak gain of 113,000 in October, well below the market consensus of 150,000 and following the September reading of 89,000. Will nonfarm payrolls follow suit or will we see another hot release?

The US dollar has run into some headwinds since the Federal Reserve’s decision to maintain interest rates for a second straight time. Fed Chair Powell tried to sound hawkish and reiterated that rate hikes remain on the table. The markets don’t expect any further rate hikes, however, and if today’s nonfarm payrolls is weaker than expected, it would likely signal the end of the current tightening cycle. Conversely, a strong non-farm payrolls report would support the Fed’s stance that rate hikes remain on the table and would likely translate into strong gains for the US dollar.

The Fed will also be keeping an eye on wage growth, a driver of inflation. Wages rose 0.2% m/m in September and the market estimate for October stands at 0.3%. On an annualized basis, wage growth is expected to ease to 4.0% in October, down from 4.2% in September.

The Bank of England voted to maintain interest rates at 5.25% at Thursday’s meeting, although the 6-3 vote in the MPC indicates that there are deep divisions regarding rate policy. Governor Bailey said after the meeting that higher interest rates had pushed inflation lower but it was “much too early to be thinking about rate cuts.” Inflation has been falling in the UK, but the current clip of 6.7% is well above the BoE’s target of 2% and is the highest in the G-7 club.

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GBP/USD Technical

• GBP/USD is testing resistance at 1.2175. Above, there is resistance at 1.2251
• There is support at 1.2068 and 1.2032

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