Pound Sterling falls vertically as US CPI accelerates, UK factory data eyed
|- Pound Sterling has stabilized above 1.2700 on upbeat market sentiment.
- The release of UK factory data, if upbeat, would ease fears of a technical recession.
- The US Dollar delivers a modest recovery ahead of US Inflation data.
The Pound Sterling (GBP) faces an intense sell-off as the market sentiment has been impacted significantly. Higher-than-projected United States Consumer Price Index (CPI) data has escalated volatility in global markets. The US Bureau of Labor Statistics (BLS) has reported that monthly headline and core inflation were up by 0.3%. The annual headline inflation rose at a significant pace of 3.4% vs. expectations of 3.2% and the prior reading of 3.1%. The core inflation grew by 3.9%, slightly slower than the prior reading of 4.0% but remained higher than expectations of 3.8%.
Further action in the Pound Sterling will be guided by the UK factory data, which is due to be released on Friday. Last month, UK Finance Minister Jeremy Hunt commented that the economy is not as bad as revised Gross Domestic Product (GDP) numbers for the third quarter would suggest. The economic data is expected to remain upbeat but risks of a technical recession are still high as the BoE forecasted a stagnant performance in the last quarter of 2023.
Daily Digest Market Movers: Pound Sterling faces a sell-off on downbeat market mood
- Pound Sterling faces intense sell-off as appeal for risk-perceived assets have lost traction after a sharp increase in the United States headline inflation data for December.
- A sticky inflation report has dialed down bets in favour of rate cuts from March.
- Fed policymakers are widely anticipated to keep interest rates unchanged at 5.25-5.50% in January monetary policy meeting and may also maintain a restrictive guidance on interest rates.
- On the domestic front, the Pound Sterling will be guided by the factory and Gross Domestic Product (GDP) data for November, which will be published on Friday.
- Annual Manufacturing and Industrial Production data are forecasted to grow by 1.7% and 0.7% respectively. The monthly data is projected to rise by 0.3%. Monthly GDP is seen expanding by 0.2% after shrinking by 0.3% in November.
- Upbeat factory data may trim fears of a technical recession in the UK economy.
- The Bank of England continues to struggle, caught between high price pressures and deepening recession fears.
- On Wednesday, BoE Governor Andrew Bailey emphasized on bringing inflation back to the 2% target. While comparing the current scenario with the global financial crisis, Bailey said UK households with mortgages are nowhere near as stretched as during the subprime crisis. He added that incomes of households have risen in recent months.
- The US Dollar Index (DXY) has rebounded sharply to 102.70 as Fed policymakers may strongly argue in favour of keeping interest rates higher currently.
Technical Analysis: Pound Sterling faces pressure above 61.8% Fibo retracement
Pound Sterling witnesses a steep fall after refreshing weekly high near 1.2770 as the risk-appetite of the market participants has dampened after the release of the higher US inflation data. The GBP/USD pair is failing to attain stability above the 61.8% Fibonacci retracement at 1.2710 (of the move from 13 July 2023 high at 1.3142 to 4 October 2023 low at 1.2037). The overall trend is still bullish as all short-to-long term Exponential Moving Averages (EMAs) are sloping higher.
The 14-period Relative Strength Index (RSI) is hovering around 60.00. A decisive break above the same will trigger a bullish 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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