British Pound pulls back from session highs as BoE Bailey tames rate hike hopes

GBP/USD retreats to 1.3520 from session highs near 1.3550 and turns negative on daily charts.
BoE Bailey calls for flexibility on monetary policy and cools hopes of a September rate hike.
On Thursday, BoE's Pill reiterated the need to hike the Bank Rate to 4%.

The British Pound (GBP) has retreated from session highs just below 1.3550 against the US Dollar (USD) during the London trading session, returning to levels near 1.3520 and turning negative on the daily chart. Bank of England (BoE) Governor Andrew Bailey called for flexibility on monetary policy, cooling hopes for an interest rate hike at September's monetary policy meeting.

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Bailey defended at a conference hosted by the London School of Economics that the bank has the responsibility to keep inflation anchored, but that policymakers “do exercise choice on how fast to bring inflation back to target”.

Beyond that, the BoE Governor suggested that he understands the Federal Reserve (Fed) Chair, Kevin Warsh’s reluctance to provide forward guidance, as, he stated, central banks need to preserve flexibility in responding to changing economic and inflation conditions, rather than committing to a predetermined rate path.

BoE Pill’s hawkish comment boosted the British Pound on Thursday

Previously, the Pound had rallied against its main peers, as BoE Committee member Huw Pill reiterated his call to hike the BoE’s Bank Rate to 4%, at a roundtable in the Edinburgh Chamber of Commerce. Pill affirmed that “clear, prompt and decisive policy action and communication would help steer markets and reduce uncertainty.”

"Raising the bank rate on this basis doesn’t signal prolonged aggressive hikes," according to Pill, who added that a prompt increase in interest rates might “head off some potential insidious catch-up dynamics.”

The main focus on Friday, however, is in the US, where the Bureau of Labour Statistics will release August’s Nonfarm Payrolls (NFP) report. The US economy is expected to have created 56K new jobs last month following an unexpected 23K drop in July. This time, however, the impact of the release in the US Dollar is likely to be softer than usual, as investors await next week's Consumer Price Index (CPI) figures to assess the chances of a rate hike at the Fed meeting on September 15 and 16.

Economic Indicator

Nonfarm Payrolls

The Nonfarm Payrolls release presents the number of new jobs created in the US during the previous month in all non-agricultural businesses; it is released by the US Bureau of Labor Statistics (BLS). The monthly changes in payrolls can be extremely volatile. The number is also subject to strong reviews, which can also trigger volatility in the Forex board. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish, although previous months' reviews and the Unemployment Rate are as relevant as the headline figure. The market's reaction, therefore, depends on how the market assesses all the data contained in the BLS report as a whole.

Why it matters to traders?

America’s monthly jobs report is considered the most important economic indicator for forex traders. Released on the first Friday following the reported month, the change in the number of positions is closely correlated with the overall performance of the economy and is monitored by policymakers. Full employment is one of the Federal Reserve’s mandates and it considers developments in the labor market when setting its policies, thus impacting currencies. Despite several leading indicators shaping estimates, Nonfarm Payrolls tend to surprise markets and trigger substantial volatility. Actual figures beating the consensus tend to be USD bullish.

Economic Indicator

Unemployment Rate

The Unemployment Rate, released by the US Bureau of Labor Statistics (BLS), is the percentage of the total civilian labor force that is not in paid employment but is actively seeking employment. The rate is usually higher in recessionary economies compared to economies that are growing. Generally, a decrease in the Unemployment Rate is seen as bullish for the US Dollar (USD), while an increase is seen as bearish. That said, the number by itself usually can't determine the direction of the next market move, as this will also depend on the headline Nonfarm Payroll reading, and the other data in the BLS report.