Pound Sterling clings to gains amid higher risk appetite, UK GDP hogs limelight

Pound Sterling is expected to deliver more upside amid a risk-on market mood.
The UK economy is seen marginally contracting in Q3 due to higher interest rates – a negative for Pound Sterling.
Deepening Middle East tensions could keep the broader risk profile negative.

The Pound Sterling (GBP) looks set to deliver a fresh upside as the market mood is supportive for risk-sensitive assets. The GBP/USD pair is aiming for more upside as investors hope that the policy divergence between the Federal Reserve (Fed) and the Bank of England (BoE) will not widen further since they are both sufficiently restrictive to ensure price stability.

Further action in the Pound Sterling could be guided by the preliminary Q3 Gross Domestic Product (GDP) for 2023, which will be published later this week. Economists project a marginally negative Q3 GDP as UK firms cut heavily on workforce and inventories due to a poor demand environment. Business investment is expected to remain lower in the July-September quarter as firms postpone their plans for capacity expansion to avoid higher borrowing costs.

Daily Digest Market Movers: Pound Sterling remains upbeat amid soft US Dollar

Pound Sterling gathers strength for a fresh upside above the immediate resistance of 1.2400 as the market sentiment is quite upbeat on hopes that the Federal Reserve (Fed) will not raise interest rates further.
Improved market sentiment has strengthened demand for risk-perceived assets. While the US Dollar is expected to extend downside further.
The GBP/USD pair refreshes a six-week high after US labor demand softened in October, triggering a risk-on impulse.
The strength in the GBP/USD pair is backed by an intense sell-off in the US Dollar. Therefore, the pair could lose gains once the cleansing of longs in the Dollar is done.
Pound Sterling recovered significantly last week after the Bank of England (BoE) paused interest rates, leaving them unchanged at 5.25% for the second time in a row.
Fresh inflation forecasts from the BoE indicated that consumer inflation would come down to 4.6% by the year-end.
This indicated that the UK Prime Minister Rishi Sunak would manage to accomplish his promise of halving inflation to 5.4% by 2023 ends. UK Sunak promised to halve inflation in January when inflation was at 10.7%.
This week, investors will keenly focus on the preliminary Q3 GDP for 2023. Economists expect the economy to have contracted by 0.1% against 0.2% growth in the April-June quarter.
Weak projections for the July-September quarter are based on deteriorating demand conditions due to higher interest rates and the deepening cost of living crisis.
Business optimism has dropped to a 10-month low due to higher interest rates, which has forced companies to make heavy cuts to employment, purchasing, and inventories.
The upside risks to Middle East tensions escalate as Israeli Prime Minister Benjamin Netanyahu rejected calls for a ceasefire when meeting with the US Secretary of State Antony Blinken on Friday.
Meanwhile, S&P Global has reported that the Construction PMI for October surprisingly improved but remained below the 50.0 threshold. The economic data has landed at 45.6, better than expectations of 44.5 and the former reading of 45.0.
The US Dollar Index (DXY) remains vulnerable as the US economy has started feeling the burden of higher interest rates by the Fed. US labor demand remained weak in October. Employers hired 150K job seekers, which were lower than expectations of 180K and upwardly revised September’s reading of 297K.
The Services PMI, which gauges activity in the US service sector – a sector that accounts for two-thirds of the US economy-declined to 51.8 against expectations of 53.0, and a 53.6 reading from September.

Technical Analysis: Pound Sterling consolidates near 1.2400

Pound Sterling prepares for a fresh upside above the immediate resistance of 1.2400 amid improved market sentiment. The near-term trend for the GBP/USD pair turns bullish as it has delivered a breakout of the Symmetrical Triangle chart pattern formed on a daily timeframe. The Cable has climbed above the 20 and 50-day Exponential Moving Averages (EMAs) and has come closer to the 200-day EMA, which trades around 1.2400.

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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