Pound Sterling recovery falters as UK factory activities continues losing spell
|- Pound Sterling finds offers near 1.2220 as the market mood dampens.
- Investors remain uncertain whether UK PM Sunak fulfills the promise of halving inflation by year-end.
- Jeremy Hunt is expected to raise the minimum wage to offer some relief to workers against high inflation.
The Pound Sterling (GBP) surrendered gains as the S&P Global reported a contraction in the United Kingdom's Manufacturing PMI for the 14th time in a row and the US Dollar rebounded ahead of Federal Reserve (Fed) Governor Jerome Powell's speech.. The GBP/USD pair is struggling to improve the United Kingdom’s learning curve in handling the repercussions of higher interest rates by the Bank of England (BoE). The BoE has paused its policy-tightening spell after raising them to 5.25% to safeguard the economy from further slowdown.
A sheer volatility is anticipated in the Pound Sterling ahead as UK Finance Minister Jeremy Hunt is expected to raise the minimum wage and ignore tax cuts at the annual Conservative Party conference.
Daily Digest Market Movers: Pound Sterling faces pressure as US Dollar rebounds
- Pound Sterling fails to extend recovery and reverses to the six-month low near 1.2100 as investors remain worried about the upside risks of a recession in the UK economy.
- Higher interest rates by the Bank of England and consumer inflation risks due to a pause in policy tightening have dented the demand outlook.
- The GBP/USD failed to extend recovery as S&P Global reported that the Manufacturing PMI for September remained below the 50.0 threshold for the 14th time in a row. The economic data improved nominally to 44.3 vs. estimates and the former release of 44.2.
- Like other developed economies, the UK’s manufacturing sector is going through a vulnerable phase. Its labor demand and Services PMI were performing well, but now they are also facing the wrath of tight monetary policy and stubborn inflation.
- UK employers reduced their labor force in the last two months as firms aim to achieve efficiency through controlling costs in an uncertain demand environment. Services PMI has landed below the 50.0 threshold two times in a row, which indicates a contraction in service activities.
- The UK’s housing market consistently faces the consequences of higher interest rates. The BoE reported on Friday that credit approvals for house purchases dropped sharply to 45,354 vs. Reuters’ expectations of 49,532 as mortgage rates rise.
- Going forward, investors will focus on the announcement of a higher minimum wage by UK FM Jeremy Hunt at the annual Conservative Party conference. This weekend, UK Hunt announced, "We are waiting for the Low Pay Commission to confirm its recommendation for next year. But I confirm today, whatever that recommendation, we will increase it next year to at least 11 pounds an hour," as reported by Reuters.
- Jeremy Hunt ruled out tax cuts ahead of November’s mid-year fiscal statement to support UK PM Rishi Sunak’s promise of halving headline inflation by year-end.
- Meanwhile, the market mood has begun improving as investors shrug off the risk associated with a global slowdown. The US Dollar Index (DXY) faces selling pressure around 106.00.
- The USD index remained volatile on Friday despite a soft core Personal Consumption Expenditure (PCE) report for August. Monthly Core PCE expanded at a nominal pace of 0.1% in August against expectations and the former release of 0.2%. The annualized Core PCE has softened to 3.9% as expected from the former release of 4.3%.
- The Federal Reserve’s preferred inflation tool, Core PCE, now makes it less likely that the central bank will add another rate hike this year.
Technical Analysis: Pound Sterling drops to near 1.2100
The Pound Sterling reverses to the six-month low near 1.2110 as risk-off mood rebounds. The outlook for the GBP/USD pair weakens and is expected to surrender gains. The GBP/USD pair discovered buying interest as momentum oscillators turned oversold. The Cable could deliver a mean-reversion move to near the 20-day Exponential Moving Average (EMA) at 1.2340. The broader bias remains weak as the Cable is trading below the 200-DEMA, which trades around 1.2465.
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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