Pound Sterling refreshes three-week high as soft US data improves market mood

Pound Sterling recovers sharply on cheerful market mood.
The BoE keeps interest rates steady to safeguard the economy from recession.
UK Rishi Sunak is expected to fulfill his promise of halving inflation to 5.4% by the year-end.

The Pound Sterling (GBP) advances swiftly as improved market sentiment outperforms a stagnant growth outlook for the UK economy. The market mood has turned extremely upbeat after the United States labor demand slowed in October and the Unemployment Rate rose beyond expectations.

The near-term demand for the GBP/USD pair depends on the performance of the UK economy in the fourth quarter of 2023. The latest information about the UK economy, however, indicates that the manufacturing sector continued its downturn in October due to higher borrowing costs and the cost of living crisis. This has set a negative undertone for the growth rate in the October-December period.

S&P Global reported that Services PMI improved to 49.5 against expectations of 49.2 and September's reading of 49.3 but remained below the 50.0 threshold for the third month in a row. The agency reported that New Orders were the lowest since November 2022 as high consumer inflation has stretched households' budget.

The Bank of England (BoE) held interest rates unchanged at 5.25% on Thursday for the second time in a row so as not to trample on the limited growth there is. There are signs the economy is barely managing to avoid a recession. Business optimism has dipped to a ten-month low, which has forced employers to make deep cuts to payrolls, purchasing, and inventories. In relation to the inflation outlook, BoE Governor Andrew Bailey seems confident that the central bank can bring down inflation to 2% in two years.

Daily Digest Market Movers: Pound Sterling capitalizes on declining US Dollar

Pound Sterling climbs to near 1.2300 as the softer-than-anticipated labor market data has improved the risk appetite of the market participants.
The cheerful market mood has dragged the US Dollar Index (DXY) vertically. As per the US NFP report, employers hired 150K job seekers in October, which were lower than expectations of 180K and the downwardly revised reading of 297K in September. The US Unemployment Rate rose to 3.9%.
The GBP/USD pair took the steady interest rate decision from the Bank of England (BoE) positively on Thursday and moved higher to 1.2220.
BoE policymakers: Megan Greene, Jonathan Haskel, and Katherine Mann voted for a 25 basis points (bps) rate hike while the other six policymakers advocated for maintaining the status quo.
The upside in the Pound Sterling remained restricted as the decision to keep interest rates unchanged at 5.25% by the BoE, was taken mainly because of fears the economy could tip into a recession.
The growth rate in the forward quarters is expected to remain stagnant due to Middle East tensions, deteriorating labor demand, weak demand outlook, poor consumer spending, and poor housing market.
S&P Global reported that the UK manufacturing downturn continued at the start of the final quarter of the year, meaning the factory sector remains a weight dragging on an economy already skirting with recession.
Over the interest rate guidance, BoE Governor Andrew Bailey warned that the central bank will keep interest rates elevated long enough to squeeze out excess price pressures above the 2% inflation target.
Andrew Bailey kept the door open for further policy-tightening and ruled out rate cut hopes in the near term as inflation in the UK economy is the highest among G7 economies.
The BoE’s inflation forecast was for headline inflation to soften to 4.6% by Q4 of 2023. Inflation in the one-to-two-year timeframe is seen easing to 3.1% and 1.9% respectively.
Fresh inflation projections by the central bank indicate that UK Prime Minister Rishi Sunak will fulfill his promise of halving inflation to 5.4% by the year-end.
Meanwhile, deepening Middle East tensions are keeping global economies on their toes. The Israeli army has confirmed that their troops have encircled Gaza and a ceasefire is not likely at all.
US Secretary of State Anthony Blinken has arrived in Israel for talks to pause a ground invasion by the Israeli Defence Forces (IDF) for a secured dispatch of humanitarian aid and to take concrete steps for protecting hostages.

Technical Analysis: Pound Sterling climbs above 1.2300

Pound Sterling jumps vertically above the round-level resistance of 1.2300 amid improved market mood. The GBP/USD pair has attempted a breakout of the symmetrical triangle pattern formation on the daily timeframe, which will result in a volatility expansion. The Cable attempts to stabilize above the 20-day Exponential Moving Average (EMA) at 1.2186. If the GBP/USD pair manages to do so, the near-term demand for the Pound Sterling is likely to turn positive.

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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