- Pound Sterling drops vertically near 1.2700 as investors await fresh triggers for further action.
- United Kingdom’s economic outlook dampens as the BOE prepares for further policy tightening.
- The market mood remains cautious as investors shift focus to inflation data.
The Pound Sterling (GBP) witnesses selling pressure as higher interest rates by the Bank of England (BoE) elevate the burden on the United Kingdom’s housing sector, hiring trend, and factory activities. The GBP/USD pair faces pressure as BoE policymakers keep the door open for further policy tightening so that inflation returns to 2%.
BoE’s Pill seems confident that United Kingdom’s inflation will soften to 5% this year and the desired rate will be achieved in the first half of 2025. In the process of achieving 2% inflation, the British economy could enter into a recession. Going forward, Q2 Gross Domestic Product (GDP) data will remain in the spotlight.
Daily Digest Market Movers: Pound Sterling faces pressure of cautious market mood
- Pound Sterling finds selling interest while attempting to cross its two-day high near 1.2780 as fears of a recession in the United Kingdom deepens on expectations of more interest-rate hikes from the Bank of England.
- Due to deepening recession fears, UK firms slowed down permanent staff hiring last month by the most since mid-2020, per a survey by the Recruitment & Employment Confederation (REC) and KPMG, Reuters reported.
- Last week, BoE policymakers delivered a 25-basis-point (bps) interest-rate hike and pushed rates to 5.25%, which keeps the door open for further policy tightening.
- And now, BoE chief economist Huw Pill said on Monday that a lot of interest rate hikes are yet to hit the economy.
- It is worth noting that inflationary pressures in the UK economy are majorly fueled by labor shortages and elevated food inflation.
- BoE Pill believes that food inflation would ease to 10% by late 2023 but should drop further so that a victory over inflation could be announced. UK’s food inflation has already softened to 17.3% from its peak of 19.1%.
- About the overall inflation outlook, Huw Pill seems confident that inflation will fall to 5% this year as promised by UK PM Rishi Sunak. Price stability will be achieved in the first half of 2025.
- On Monday, the British Retail Consortium (BRC) reported a decline in Like-For-Like Retail Sales for July. It dropped sharply to 1.8% vs. June’s reading of 4.2%. Sales growth dropped to an 11-month low as British retailers suffered from heavy rain in July.
- This week, investors will majorly focus on Q2 Gross Domestic Product (GDP), and factory activities data, which will be published on Friday at 06:00 GMT.
- The market mood turns cautious as investors await the Consumer Price Index (CPI), which will be released on Thursday.
- The US Dollar Index (DXY) faces barricades near the immediate high of 102.40. The USD Index could move higher as Federal Reserve (Fed) policymakers deliver mixed guidance about interest rates.
- Fed Governor Michelle Bowman said the collaboration of still-elevated inflation and an upbeat labor market supports further policy tightening ahead.
- New York Fed President John C. Williams said on Monday in the New York Times that the possibility of cutting rates in early 2024 cannot be ruled out.
Technical Analysis: Pound Sterling struggles to sustain above 1.2700
Pound Sterling demonstrates a volatility contraction around 1.2750 as investors await crucial inflation data this week. The Cable fails to return above into the Rising Channel chart pattern formed on the daily chart. This could push the asset into a bearish trajectory for a longer period. The asset struggles to sustain above the 50-day Exponential Moving Average (EMA).
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data.
Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates.
When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP.
A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.
If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
Source: https://www.fxstreet.com/news/pound-sterling-turns-back-and-forth-as-focus-shifts-to-gdp-data-202308080652