- Pound Sterling trades inside Wednesday’s range as the market mood remains quiet.
- The UK economy faces varied consequences of higher interest rates by the BoE.
- Britain’s GDP for July fell by 0.5% due to a decline in service industry output.
The Pound Sterling (GBP) trades back and forth as investors await the UK CPI data for August, which will set an undertone for the Bank of England’s (BoE) September monetary policy decision. The GBP/USD pair consolidates as investors hope that a hawkish interest rate decision from the BoE will scrap its policy divergence with the Federal Reserve (Fed).
The UK economy is facing varied troubles due to BoE’s restrictive interest rate policy stance such as severely strong wage growth, and a labor market in which demand has started easing. The British economic outlook has turned vulnerable as the overall output is shrinking due to a deteriorating demand environment. The likelihood of reporting a technical recession by the UK economy is higher as more interest rate hikes from the BoE are already in the pipeline.
Daily Digest Market Movers: Pound Sterling juggles amid a quiet market mood
- Pound Sterling trades without direction around 1.2500 as investors shift their focus to the UK inflation data for August, which will provide meaningful cues about the September rate decision.
- Investors see August consumer inflation data as extremely stubborn as wage growth momentum in July remains stronger than anticipated despite a slowdown in labor demand.
- Sarah Breeden, who will replace BoE Deputy Governor Jon Cunliffe in November, warned that risks to inflation are skewed to the upside. She forecasts the achievement of price stability in two years.
- Average Earnings Excluding Bonuses in the three months to July landed at 7.8%, in line with estimates and the former release. Wage growth data including bonuses rose to 8.5% against projections and the former release of 8.2%.
- Higher wage growth and soft labor demand indicate that UK firms are spending more on retaining employees, which could keep consumer spending robust.
- The BoE is widely expected to raise interest rates in September as the battle against persistent inflation is far from over. This would be the 15th straight interest rate increase. Investors anticipate an interest rate hike of 25 basis points (bps), which will push interest rates to 5.50%.
- An interest rate decision of 25 bps could equalize the policy divergence of the BoE with the Fed.
- Aggressively raised interest rates by the BoE have resulted in varied consequences for the UK economy. UK’s monthly Gross Domestic Product (GDP) for July shrank by half a percent, contributed majorly by service output, which dropped by 0.5%. The arts, entertainment, and recreation sector positively contributed due to the release of Barbie and Oppenheimer.
- UK’s Office for National Statistics (ONS) reported that monthly Industrial Production contracted by -0.7%, which was a higher pace than expectations of -0.6%. In June, the economic indicator expanded by 1.8%.
- Monthly Manufacturing Production contracted by -0.8%, while investors anticipated a contraction of -1.0%. In the same period a month ago, the economic data expanded by 2.4%.
- Reuters reported that Britain’s economy contracted in July at an unexpectedly sharp rate after strikes in hospitals and schools as well as unusually rainy weather weighed on output.
- The momentum at which the British economy is slowing down indicates that it is exposed to a recession.
- Meanwhile, the US Dollar continues to trade in a limited range after volatility inspired by stickier CPI data for August cools down.
- US headline inflation expanded at a 0.6% pace as anticipated by market participants due to a significant rise in gasoline prices. Core CPI that excludes volatile oil and food prices expanded by 0.3%, higher than estimates and July’s reading of 0.2%.
- Slightly hotter inflation data failed to boost hawkish Fed bets. As per the CME Fedwatch Tool, traders see a 97% chance of interest rates remaining unchanged at 5.25-5.50% against a 93% chance recorded before the inflation data release.
Technical Analysis: Pound Sterling hovers around 200-DEMA
Pound Sterling is consistently defending the crucial support of 1.2440. The downside bias is still upbeat as the UK economy is struggling to absorb the burden of higher interest rates. The Cable consolidates near the 200-day Exponential Moving Average (EMA). The short-term trend is bearish as the 20 and 50-day EMAs are downward-sloping, and momentum oscillators portray strength in the bearish impulse.
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.
Read the full article here