GBP/USD remained near 31-year lows paring slight gains late in Thursday’s session, as leading economists and analysts urged the U.K. to act expeditiously to resolve key trade differences with partners throughout the European Union in the wake of last month’s Brexit decision.
The currency pair traded at 1.2914 at the close of U.S. afternoon session (down 0.05 or 0.13%), capping a frenzied day of trading when the Pound briefly nudged above 1.30 at session-highs. The Pound Sterling extended losses from Wednesday’s session when it fell below 1.28 against the U.S. Dollar for the first time since 1985. Since polls closed in the historic Brexit referendum two weeks ago, the Pound has tumbled more than 12% against its American counterpart.
GBP/USD likely gained support at 1.2796, the low from July 6 and was met with resistance at 1.3535, the high from June 30.
Earlier, International Monetary Fund managing director Christine Lagarde said in an interview with the Financial Times that the U.K. could soften the effects of the Brexit decision by agreeing to a deal that would grant it access to the European Union’s single market, while complying with the bloc’s laws on freedom of movement. A swift resolution could reduce Britain’s GDP growth by only 1.5% through 2019, Lagarde said. Mohamed El-Erian, chief economic advisor at Allianz (DE:ALVG), also cautioned on Thursday that the British Pound could hit parity with the U.S. Dollar if leaders in the U.K. fail to develop an alternative plan that provides businesses nationwide with a free trade agreement with members of the bloc.
„After the Brexit referendum, the UK has to urgently get its political act together, including a new Prime Minister who can negotiate effectively with the EU. Plan B depends on the politicians in London and across the Channel, but so far they have not stepped up to their economic governance responsibilities,” El-Erian told Reuters.
On Friday, investors will turn their attention to a critical June U.S. jobs report for signs of recovery in the slumping labor market. In May, nonfarm payrolls rose by 38,000, the lowest monthly increase in nearly six years. Analysts expect that the report from the U.S. Department of Labor will show monthly job gains of 180,000, its highest total in three months. Economists expect a rebound following the return of approximately 35,000 Verizon workers, which were on strike in June during a labor dispute.
As a prelude, ADP said in its monthly employment report on Thursday that nonfarm payrolls rose by 172,000 in June, above May’s revised total of 168,000 and considerably higher than consensus estimates of 150,000. While Federal Reserve chair Janet Yellen has emphasized the importance of not placing an undue amount of weight on a single report, the Federal Open Market Committee (FOMC) characterized the slowing labor market as a factor for holding interest rates steady at its monetary policy meeting last month. Prior to the disappointing report, Yellen said at a speech at Harvard University in late-May that it could be appropriate to raise interest rates in the coming months. Since then, the FOMC lowered its long-term rate outlook while markets have taken a 2016 rate hike off the table entirely.
The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, rose more than 0.20% to an intraday high of 96.35 before inching down to 96.33 at the close of U.S. afternoon trading. Although the index is up by more than 2.5% since the Brexit referendum, it is still down by approximately 4% from its December highs.
Any rate hikes by the Fed this year are viewed as bullish for the dollar as investors pile into the greenback in order to capitalize on higher yields.
Yields on the U.S. 10-Year gained two basis points to 1.38%, while yields on the U.K. 10-Year also rose two basis points to 0.78%. Over the last month, yields on both 10-year government bonds have fallen by more than 20 basis points.