Pound Sterling retraces against US Dollar ahead of US NFP data

• The Pound Sterling corrects to near 1.3550 against the US Dollar as the Greenback gains ground ahead of the US NFP data release for May.
• The US Dollar attracted bids after US President Trump expressed confidence over the Sino-US trade talks.
• Data from a survey shows that the number of UK firms worried about US tariffs declined sharply following the UK-US trade agreement.

The Pound Sterling (GBP) corrects slightly to near 1.3550 against the US Dollar during the European trading session on Friday, falling from a fresh three-year high of 1.3620 posted the previous day. The GBP/USD pair faces selling pressure as the US Dollar (USD) gains ground ahead of the United States (US) Nonfarm Payrolls (NFP) data for May, which will be published at 12:30 GMT.

The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, ticks up to near 98.85.

The US official employment data is expected to influence the next move in the US Dollar as it will likely impact market expectations for the Federal Reserve's (Fed) monetary policy outlook. According to the estimates, US employers are expected to have hired 130K fresh workers, lower than the 171K added in April. The Unemployment Rate is seen as steady at 4.2%.

Average Hourly Earnings data, a key measure of wage growth, is estimated to have risen 3.7% on year, slower than 3.8% increase in April. Month-on-month, wage growth is expected to come in at 0.3%, faster than the prior reading of 0.2%.

This week, traders raised bets that the Fed will cut interest rates in July after the ADP Employment Change and ISM Purchasing Managers' Index (PMI) data for May exhibited poor labor demand and a decline in economic activity. According to the CME FedWatch tool, the probability of the Fed lowering interest rates in the July meeting has increased to 32.8% from 22.5% a week ago.

However, in their public speeches, Fed officials are still endorsing a wait-and-see approach on interest rates, citing upside risks to inflation due to the US President Donald Trump's tariff policy and the apparent resilience in labor demand.

"I see greater upside risks to inflation and potential downside risks to employment and output growth," Fed Governor Adriana D. Kugler said at the Economic Club of New York on Thursday. She added that the labor market appears "resilient and stable", and the economic activity continues to grow but at a "more moderate pace than the second half of 2024".

FXStreet's speech tracker, which gauges the tone of Fed officials' speeches on a dovish-to-hawkish scale from 0 to 10 using a custom AI model, rated Kugler's words as hawkish with a score of 6.4."

Daily digest market movers: Pound Sterling trades lower against its major peers

• The Pound Sterling underperforms its major peers, except against the Japanese Yen (JPY), on Friday. 
• The Bank of England's (BoE) latest Decision Maker Panel survey shows that the number of firms citing US trade policy as a major concern has decreased. According to the survey, the percentage of firms citing international risk as one of the top three concerns has been reduced to 12% from 22% seen last month following the trade agreement between the UK and the US.
• Trade tensions between Washington and Beijing have also eased somewhat after a post from US President Donald Trump on Truth.Social confirmed a call with Chinese President Xi Jinping and suggested that trade negotiations between the two nations would proceed smoothly. "The call lasted approximately one and a half hours and resulted in a very positive conclusion for both countries," Trump wrote.
• On the monetary policy front, traders have pared bets supporting another BoE interest-rate cut this month due to accelerating inflationary pressures. During the last meeting, when the UK central bank cut rates by 25bps to 4.25%, the BoE guided a "gradual and careful" monetary expansion approach.

Technical Analysis: Pound Sterling stays above key 20-day EMA

The Pound Sterling retraces to near 1.3550 against the US Dollar on Friday, holding above the key horizontal support plotted from the September 26 high of 1.3434. The outlook for the pair remains firm as the 20-day Exponential Moving Average (EMA) slopes higher around 1.3443.

The 14-day Relative Strength Index (RSI) is around 60.00, suggesting that a bullish momentum is intact.

On the upside, the January 13, 2022, high of 1.3750 will be a key hurdle for the pair. Looking down, the 20-day EMA will act as a major support area.