Pound Sterling maintains strength despite sticky inflation bites households' pocket
|- Pound Sterling has moved north swiftly as United States Nonfarm Payrolls missed estimates.
- Households in the United Kingdom are facing a burden as stubborn inflation bites individuals’ pockets.
- Market participants are anticipating that interest rates by the Bank of England will peak around 6.5%.
Pound Sterling has jumped to near the round-level resistance of 1.2800 despite the impact of higher interest rates by the Bank of England (BoE) has put a heavy burden on United Kingdom households. The GBP/USD pair has picked immense strength as the United States Nonfarm Payrolls (NFP) have missed expectations. The US economy added 209K fresh jobs in June while the street was anticipating the fresh addition of 225K. Last month, Employment additions were 306K.
Andrew Bailey has accused United Kingdom’s industry regulators of overcharging prices for fuel to strengthen aggressive monetary policy. The central bank is looking for options beyond quantitative tools to bring down inflation, which is restricting to leave territory above 8.5%. Going forward, investors will focus on the interest rate guidance from BoE policymakers.
Daily Digest Market Movers: Pound Sterling maintains strength as risk appetite improves
- Higher interest rates in the United Kingdom have started impacting the housing market. Excluding two months of the pandemic, British housebuilding fell in June at the sharpest pace in more than 14 years due to higher borrowing costs, as reported by Reuters.
- The impact of higher borrowing costs due to aggressive policy-tightening by the Bank of England has widened its scope from the realty sector to economic activities.
- June’s Services PMI matched expectations of 53.7 but remained lower than the former release of 55.2. While Manufacturing PMI contracted straight for eleven months.
- Labor shortages in the UK economy are expected to escalate as a poll from Reuters indicated that almost one in three female workers is expecting to consider early retirement because of health issues.
- Investors should note that labor shortages have remained a major trigger behind stubborn UK inflation due to Brexit and early retirement.
- BoE Governor Andrew Bailey has accused regulators of overcharging prices for fuel that have propelled inflationary pressures.
- Andrew Bailey cited on Thursday that borrowers would face severe heat in the process of achieving price stability.
- Market participants are anticipating that interest rates by the Bank of England will peak around 6.5%.
- BoE’s Monthly Decision Maker Panel (DMP) revealed on Thursday, the UK businesses projected year-ahead Consumer Price Index (CPI) inflation at 5.7% in June vs. 5.9% estimated in May.
- Economists at Commerzbank expect that the BoE hesitated for so long means that in the end, an even more restrictive monetary policy will become necessary to anchor inflation expectations and limit second-round effects, which might put strong pressure on the economy.
- The US Dollar Index has rebounded after picking strength near 103.00 as upbeat labor market data has propelled chances of more interest rates from the Federal Reserve (Fed).
- United States Automatic Data Processing (ADP) agency has reported that the payroll figure doubled in June at 497K vs. expectations of 228K and the former release of 278K.
- In addition to the US ADP report, US ISM Services PMI also remained better than expectations. Services PMI landed at 53.9 against the consensus of 51.0 and the prior release of 50.3.
- US Unemployment Rate has slipped to 3.6% as expected by the market participants. Monthly Average Hourly Earnings maintained a steady pace of 0.4% vs. expectations of 0.3%.
Technical Analysis: Pound Sterling climbs to near 1.2800
Pound Sterling has exploded the consolidation formed in a range of 1.2746-1.2747 after the release of the downbeat US NFP data. The Cable is still inside the previous day’s range, which indicates a sheer squeeze in volatility. Investors are awaiting a potential trigger for building fresh positions. The Pound Sterling is auctioning above short-to-long-term daily Exponential Moving Averages (EMAs), which indicates that the overall trend is extremely bullish. Meanwhile, the Relative Strength Index (RSI) (14) is aiming to shift into the bullish range of 60.00-80.00. An occurrence of the same would activate the upside momentum.
Pound Sterling FAQs
What is the Pound Sterling?
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).
How do the decisions of the Bank of England impact on the Pound Sterling?
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.
How does economic data influence the value of the Pound?
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.
How does the Trade Balance impact the Pound?
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.
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