The Pound Sterling (GBP) trades broadly calm against its major peers on Thursday after the release of the United Kingdom (UK) monthly Gross Domestic Product (GDP) and factory data for August. The Office for National Statistics (ONS) reported that the economy grew by 0.1%, as expected, at the same pace as it contracted in July.
The Industrial Production rose by 0.4% on a monthly basis, faster than estimates of 0.2%. In July, it declined by 0.4%. Year-on-year, the Industrial Production fell at a faster pace of 0.7%, compared to estimates of 0.6% and a 0.1% decline seen in July.
Meanwhile, the Manufacturing Production grew at a faster pace of 0.7% in the same month against estimates of 0.4%. In July, output in the manufacturing sector declined by 1.1%.
Signs of recovery in the manufacturing sector and a slight Gross Domestic Product (GDP) growth are expected to offer some relief to the UK government. However, the relief is expected to remain short-lived as the government prepares to unveil the Autumn Budget next month, in which it is expected to raise taxes to fund spending on day-to-day operations.
On the monetary policy front, the speculation for more interest rate cuts by the Bank of England (BoE) in the remaining year has increased amid souring job market conditions and hopes that price pressures have peaked for now.
This week, the ILO Unemployment Rate for the three-months ending August accelerated to 4.8% from 4.7%. On the inflation front, the BoE stated in its policy meeting last month that price pressures would peak around 4% in September.
Daily digest market movers: Pound Sterling edges higher against US Dollar
- The Pound Sterling trades stably 0.1% higher, near 1.3420, against the US Dollar (USD) after the release of the UK GDP data. A slight strength in the GBP/USD pair is mainly contributed by a slight weakness in the US Dollar as trading action remains broadly calm after the UK data release.
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades close to a fresh weekly low near 98.40 posted earlier in the day.
- The Greenback faces selling pressure from a series of headwinds, especially firm Federal Reserve (Fed) dovish bets and ongoing trade frictions between the United States (US) and China.
- Traders remain increasingly confident that the Fed will cut interest rates further this year as downside risks to the labor market have escalated. According to the CME FedWatch tool, traders see a 94.6% that the Fed will reduce interest rates by 50 basis points (bps) to 3.50%-3.75% in the remaining year.
- Meanwhile, Fed Governor Michelle Bowman has also acknowledged labor market risks and has supported two more interest rate cuts this year. “I continue to see two more cuts before the end of this year,” Bowman said on Tuesday, Reuters reported.
- On the global front, US President Donald Trump has signaled that he will persuade China to halt buying Oil from Russia. This week, trade tensions between the two nations escalated after Trump threatened to impose additional 100% tariffs on Beijing, which will come into effect in early November. However, market experts remain confident that Washington might roll back its tariff decision after a meeting between Trump and Chinese leader XI Jinping scheduled later this month in South Korea.
Technical Analysis: Pound Sterling faces pressure near 20-day EMA
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The Pound Sterling trades calmly near 1.3420 against the US Dollar on Thursday. The GBP/USD pair struggles to extend its recovery above the 20-day Exponential Moving Average (EMA) around 1.3419.
The outlook for the Cable remains uncertain amid a Head and Shoulder chart pattern on a daily timeframe.
The 14-day Relative Strength Index (RSI) holds above 40.00. A fresh bearish momentum would emerge if the RSI falls below that level.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the psychological level of 1.3500 will act as a key barrier.
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, also known as ‘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.