Pound Sterling drops as BoE-Fed policy divergence expected to remain intact

• Pound Sterling retreats as market sentiment dampens due to the Israel-Palestine conflict.
• The BoE is expected to keep interest rates unchanged due to potential slowdown fears.
• A steady monetary policy decision from the BoE will keep the policy divergence with the Fed intact.

The Pound Sterling (GBP) drops as investors turn risk-averse amid upside risks to Middle East tensions ahead of the interest rate decision by the Bank of England (BoE). The GBP/USD pair faces selling pressure as the BoE is expected to keep interest rates unchanged at 5.25%, which will keep policy divergence with the Federal Reserve (Fed) intact.

The reasoning behind expectations of a steady monetary policy decision from the BoE is deepening recession fears for the UK economy. Inflation is significantly far from the desired rate of 2% and risks of price pressures remaining persistent are high as widening Middle East conflict could elevate energy prices.

Daily Digest Market Movers: Pound Sterling corrects ahead of BoE policy

• Pound Sterling falls back sharply to near 1.2140 as investors turn cautious ahead of the Bank of England’s monetary policy meeting.
• Poor economic activity, weak household spending, soft labor demand, and upside risks to energy prices are supporting the BoE to leave rates steady for the second time in a row.
• UK firms are operating at lower capacity due to a bleak demand outlook, which has cut labor demand. Firms have also postponed their expansion plans due to higher borrowing costs.
• Consumer spending has also dropped significantly as higher price pressures have squeezed the real income of households.
• The UK housing sector is also facing the wrath of higher interest rates by the BoE. The central bank reported that mortgage approvals in September at 43,328 were the lowest since January.
• The ongoing cost of living crisis and upside risks to unemployment have forced households to postpone home demand.
• Over the interest rate guidance, the BoE is expected to keep doors open for further policy tightening as headline inflation is more than thrice the desired rate of 2%. Therefore, the BoE would keep interest rates at an elevated level for a longer period.
• BoE policymaker Swati Dhingra said in October that rate cuts would be early considered if the growth rate remains lower than expectations.
• The market mood remains downbeat as a ceasefire between Israel and Palestine is unlikely. Israel’s Prime Minister Benjamin Netanyahu said that they will not agree to a cessation of fighting with Hamas.
• Meanwhile, the US Dollar recovered sharply after finding buying interest near 106.00 as investors turned cautious ahead of the monetary policy meeting by the Federal Reserve.
• Like the BoE, the Fed is also expected to keep interest rates unchanged in the range of 5.25%-5.50% on Wednesday.
• The US economy is upbeat on the grounds of labor market and consumer spending, and easing price pressures are supporting stable monetary policy. In constrast, the UK economy is struggling to bear the consequences of higher borrowing costs.
• Meanwhile, higher US long-term bond yields have tightened financial conditions.
• Apart from the Fed’s monetary policy, the US Dollar Index (DXY) will dance to the tunes of the private payrolls and the ISM Manufacturing PMI data for September, which will be published on Wednesday.

Technical Analysis: Pound Sterling corrects from four-day high

Pound Sterling falls sharply from a four-day high around 1.2180 as the market mood turns cautious due to deepening Israel-Palestine conflicts and ahead of the upcoming monetary policy from the BoE. The GBP/USD pair remains on the backfoot as the 20-day and 50-day Exponential Moving Averages (EMAs) are sloping below the 200-day EMA. Momentum oscillators struggle for a firm footing.