Pound Sterling surrenders gains as risk aversion theme strengthens
|- Pound Sterling has surrendered some of its gains as BoE Bailey has assured inflation softening.
- Steady United Kingdom Sevices PMI provided some strength to the Pound Sterling.
- Rishi Sunak has assured full utilization of monetary and fiscal tools to bring down stubborn inflation.
The Pound Sterling (GBP) has dropped half of its gains made after the headlines that Bank of England (BoE) Governor Andrew Bailey has urged industry regulators not to overcharge customers. The GBP/USD pair has printed a fresh two-week high at 1.2775 as BoE Bailey believes that moves by regulators would help in slowing down inflationary pressures. Andrew Bailey is confident that stubborn inflation will come down but borrowers would face severe consequences and the timing of the rate cut is uncertain.
The BoE has been taking some strong steps to strengthen financial conditions. United Kingdom’s inflation looks set to pick pace again as labor shortages are expected to elevate. This week, UK PM Rishi Sunk also showed confidence that price stability will be achieved.
Daily Digest Market Movers: Pound Sterling falls back to 1.2740, upside seems favored
- United Kingdom Prime Minister Rishi Sunak promised this week to fully utilize monetary and fiscal policy to tame persistent inflation.
- UK Sunak cited that inflationary pressures are showing a higher persistence than expected but that doesn’t state that the policy measures used are the wrong ones.
- The Britain government has announced that it is committed to spending 11.6 billion pounds on international climate finance.
- Firms are ramping up investments in Germany to compensate for custom delays and tedious bureaucracy inspired by an exit of Britain from the European Union.
- Financial Times reported that the Bank of England is planning to discuss with international banks to set up subsidiaries.
- Higher inflationary pressures in the UK economy are backed by shortages of labor and 45-year high food price inflation.
- Labor shortages are expected to elevate further as almost one in three female workers are expected to consider early retirement because of health issues.
- UK Finance Minister Jeremy Hunt gave his backing to the country's financial regulator Financial Conduct Authority (FCA) to ensure banks are passing on better savings rates to consumers, as reported by Reuters.
- UK's June Services PMI matched expectations and landed at 53.7.
- The monthly survey by Citi Bank and polling firm YouGov showed that consumer inflation expectations for one year have increased to 5.0% in June from 4.7% in May.
- Financial markets are anticipating that the BoE will eventually raise interest rates to 6.25% from the current state of 5%.
- The risk profile is turning positive amid an improvement in appeal for risk-sensitive assets.
- The US Dollar Index (DXY) has dropped after printing a fresh four-day high at 103.40 as investors are cautious ahead of Automatic Data Processing (ADP) Employment and Services PMI data.
- The US ADP report is expected to show fresh additions of 228K vs. the former addition of 278K.
Technical Analysis: Pound Sterling seeks support near 1.2740
Pound Sterling has climbed rooftop as investors are hoping that the high inflation situation would get under control as Producer Price inflation (PPI) is expected to cool down. The downside is well-supported around 1.2688 while the upside restriction at 1.2735 has broken. Short-to-long-term daily Exponential Moving Averages (EMAs) are upward-sloping, indicating the upside bias is solid.
Buyers could add positions if Cable manages to jump firmly above 1.2740. The upside bias could fade if it corrects below the psychological support of 1.2680.
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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