GBP/USD Concludes Bearish Month in June, What to Expect Next?

Key Highlights

  • GBP/USD is trading at 1.3796 on Friday, July 2, up 0.21% so far. The pair is down 0.7% on the week and down 2.2% since the beginning of June.

  • The US released upbeat Nonfarm Payrolls data, but it failed to support the USD due to an unexpected increase in unemployment.

  • The USD might extend its growth versus the pound in the coming weeks despite the pair’s current rebound.

GBP/USD is set to end the current week with a substantial decline despite Friday’s uptick amid a general pressure on the greenback. The American currency couldn’t leverage the somewhat upbeat Nonfarm Payrolls report released by the US Bureau of Labor Statistics, as investors focused on some disappointing details, such as a surprising increase in the unemployment rate.
As the Friday session is nearing its end, the pound versus dollar pair has dropped by 0.7% since last week and has lost more than 2.2% since the beginning of June, after two consecutive bullish months in April and May. In June, the pair dropped from above 1.4100 to around 1.3800. Still, on Friday alone, the pound is stronger and has managed to recover at least temporarily.
On larger timeframes, the US dollar extended its growth in June mainly due to inflation worries, which consequently prompted analysts to anticipate an interest hike from the Federal Reserve sooner than initially planned. As a rule, when the US central bank turns hawkish – i.e., it shows an inclination to increase the interest rate and control inflation – the US dollar ends up having the edge over its rival currencies, including the pound.

GBP/USD: What Do Fundamentals Tell Us?

On Friday, the US Bureau of Labor Statistics released its much-anticipated Nonfarm Payrolls report, which showed that job growth in the US accelerated in June more than expected, as companies increased salaries and offered more incentives to attract unemployed citizens back into the labor force. The job growth trend reflects the rapid reopening of the US economy after months of lockdown measures to curb the spread of the coronavirus.

Nonfarm payrolls rose by 850,000 last month, after an increase of 583,000 jobs in May, the Labor Department said. The reading beat analysts’ forecasts of 700,000 new jobs for June.

However, despite the upbeat labor data, the US dollar has actually lost ground against the British currency on Friday, with the GBP/USD pair adding 0.21% so far today. The reason for a weakening dollar is the unemployment rate, which surprisingly rose to 5.9% in June from 5.8% in May, while analysts expected a decline to 5.7%. Also, the average hourly earnings – a measure of wage inflation – added 0.3% last month, lower than the expected 0.4% increase.

Vassili Serebriakov, a Forex strategist at UBS, toldReuters:

“The FX market was gearing up for a stronger number all week and you saw that in the dollar’s strength. I think the bar for a positive surprise was higher as a result. We initially reacted positively to the headline, which was stronger than expected. And then moved a little lower because of some of the weaker details of the report such as the higher unemployment rate and the higher bar for a positive surprise.”

All in all, US labor data is robust and will favor the US dollar in the longer term, even though it didn’t allow the American currency to extend gains versus the pound on Friday, letting the sterling take a breath of fresh air. Elsewhere, the British government recently said that more workers in the UK had been furloughed in May than initially estimated, which doesn’t bode well for the pound.

The British finance ministry stated that 2.4 million people kept on the government’s Coronavirus Job Retention scheme at the end of May, down from a record high of 9 million in May 2020. Early data published by the Office for National Statistics (ONS) showed that 1.7 million people were furloughed in late May.

Torsten Bell, CEO of the Resolution Foundation think tank, tweeted

“Higher numbers on furlough than expected does mean a bumpier ride in aggregate, and more individuals at risk of unemployment in the months ahead.”

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