Pound Sterling refreshes six-week low amid sour market mood
|- Pound Sterling extends losses, skids below the crucial support as investors shift focus to UK Employment data.
- UK factory activity for June and Q2 GDP outperformed expectations significantly.
- A tight labor market, alongside upbeat economic performance, could increase expectations of interest-rate peak.
The Pound Sterling (GBP) weakens despite upbeat Q2 Gross Domestic Product (GDP) and factory data for June. The GBP/USD pair faces headwinds from bearish market sentiment ahead of the British employment data, which will be released on Tuesday at 6:00 GMT.
Stellar recovery in United Kingdom’s Q2 GDP data makes Bank of England (BoE) policymakers more comfortable in raising interest rates further so that a swift return of inflation to 2% can be ensured. If labor market conditions turn out tight and wage growth continues to be high, the deadly duo of upbeat economic outlook and tight employment would raise expectations of a higher interest-rate peak.
Daily Digest Market Movers: Pound Sterling drops ahead of UK employment data
- Pound Sterling drops below the intermediate support near 1.2666. More downside seems favored amid the cautious market mood and upcoming UK Employment data, which will be published on Tuesday at 06:00 GMT.
- The UK labor market is expected to add 50K new payrolls in the three months to June, less than the 102K it created in the prior three-month period. Meanwhile, the Claimant Count Change in July is expected to show a decline of 7.3K, swinging from an increase of 25.7K jobless claims in June.
- Three-month Unemployment Rate is expected to remain unchanged at 4.0%.
- A key catalyst in the UK employment report is the three-month Average Earnings excluding bonuses data in the three months to June, which is seen accelerating to 7.4% vs. the prior release of 7.3%.
- Stubborn wage growth would increase the chances of further policy-tightening by the Bank of England as households would be equipped with higher disposable income.
- Labor shortages and elevated food prices have been major contributors to higher inflationary pressures.
- On Friday, factory activity and Q2 GDP data came in stronger than expected.
- Monthly GDP swung from a contraction and grew by 0.5% in June, more than the 0.2% expected. In the January-March quarter, the economy contracted by 0.1%.
- Quarterly GDP grew by 0.2% in 2Q, while analysts had forecasted a stagnant performance. The annual growth rate was 0.4%, doubling the consensus and the prior release of 0.2%.
- Monthly Industrial Production for June expanded strongly, by 1.8% against the estimates for 0.1% growth. In May, industrial production contracted by 0.6%. On an annual basis, it rose significantly to 3.1%.
- Manufacturing Production also grew strongly on a monthly basis, by 2.4%, well above the 0.2% forecasted.
- Upbeat Manufacturing activity makes BoE policymakers more comfortable with elevating interest rates further. The rate-tightening cycle is unlikely to be paused as inflationary pressures are way higher than the desired rate of 2%.
- Market sentiment remains bearish as both the United States Consumer Price Index (CPI) and the Producer Price Index (PPI) for July showed persistent price pressures.
- US PPI, published on Friday, rose more than expected due to the rise in the cost of services.
- Still, the Federal Reserve (Fed) is widely expected to keep interest rates steady in September as the modest pace in monthly inflation of 0.2% aligns with the Fed's desired rate of 2%.
- The US Dollar Index (DXY) trades at a fresh five-week high around 103.00 amid a cautious market mood.
Technical Analysis: Pound Sterling drops to near 1.2660
Pound Sterling fails to hold above the immediate support of 1.2660. The Cable shifted into a bearish trajectory after a breakdown of the five-day Bearish Wedge chart pattern. GBP/USD trades below the 20- and 50-period Exponential Moving Averages (EMAs), signaling a bearish trend. A further break below the 1.2650 level would drag the major toward the 200-day EMA, which is at around 1.2464.
BoE FAQs
What does the Bank of England do and how does it impact the Pound?
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
How does the Bank of England’s monetary policy influence Sterling?
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
What is Quantitative Easing (QE) and how does it affect the Pound?
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
What is Quantitative tightening (QT) and how does it affect the Pound Sterling?
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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