Global financial conditions are becoming increasingly unstable due to the energy shock triggered by the conflict in the Middle East. The latest assessment by the UK’s Financial Policy Committee indicates that asset price volatility has risen significantly, whilst the market’s ability to price in fundamentals has diminished. Against this backdrop, the market has effectively carried out part of the Bank of England’s ‘tightening’ in advance. This “passive tightening” is evident across multiple fronts: rising interest rate swaps have driven fixed-rate mortgage rates significantly higher, with UK two-year and five-year mortgage rates increasing by approximately 70 to 80 basis points respectively; simultaneously, the number of mortgage products available in the market has fallen markedly, as financial institutions proactively reduce their risk exposure. Even though the central bank has not yet raised interest rates further, the household sector is already feeling the substantial tightening of financing conditions. Furthermore, the concentrated trading strategies of highly leveraged hedge funds in the UK government bond market have made yields extremely sensitive to risk sentiment, potentially triggering a sudden drop in liquidity and non-linear financial tightening. Valuations of equities and risk assets are also under pressure, with UK and European stock markets already showing signs of a correction.

Economists generally attribute the sluggish performance of the US labour market to the persistent uncertainty caused by the Trump administration’s trade and immigration policies, which are exerting downward pressure on both the supply and demand sides of the labour market, thereby dampening its vitality. Data shows that in the three months to February, non-farm payrolls in the US private sector grew by an average of just 18,000 per month, with job growth virtually at a standstill. Federal Reserve Chair Jerome Powell also described the current state of the US labour market this month as a zero-employment-growth equilibrium with downside risks. Elizabeth Rent, senior economist at personal finance website NerdWallet, added that, in addition to rising policy uncertainty, energy price shocks and supply shortages are placing tangible operational pressures on US businesses. If input costs continue to rise, companies may subsequently be forced to make the difficult choice of raising product prices or reducing staff working hours. With the March non-farm payrolls report due to be released on Friday, market attention has turned to tonight’s release of the US March ADP employment data. As a leading indicator of non-farm payrolls, this data will provide a key reference for labour market trends. The market currently expects a rebound in March non-farm payrolls, with an increase of around 55,000 jobs, whilst Bloomberg’s forecast is slightly higher at 80,000 new jobs. However, there are marked divergences in the forecasts for the ADP employment data among several major investment banks. HSBC and Bank of America expect a decline of 75,000 in March ADP employment, whilst Nomura Securities and Scotiabank forecast a reduction of 200,000. These divergent forecasts among investment banks also reflect the fact that the market has yet to reach a consensus on the trajectory of the US labour market. Economists at HSBC noted in a report that the overall underlying trend in the US labour market remains one of moderate but positive growth; however, should the ADP figures fall short of expectations, this would further reinforce the view that the labour market is continuing to cool, and would likely exert direct pressure on the US dollar exchange rate.

On the daily chart, the GBP/USD pair shows the Bollinger Bands widening downwards and moving averages diverging lower, indicating that the overall downtrend remains intact. The MACD is expected to form a golden cross, with downward momentum easing, suggesting a rebound could occur at any time. The RSI stands at 42, indicating that market sentiment remains predominantly bearish. On the four-hour chart, the Bollinger Bands are narrowing, moving averages are flattening, and downward momentum is moderating, whilst the MACD fast and slow lines have formed a golden cross. The RSI stands at 45, with lows gradually rising, suggesting a rebound could occur at any time. The recommended strategy is to buy on dips.

Trading Direction: Buy

Entry Price: 1.321

Target Price: 1.37

Stop-loss: 1.31

Support Levels: 1.32, 1.3, 1.28

Resistance Levels: 1.35, 1.38, 1.41