Pound Sterling rallies as investors ignore UK recession fears

Pound Sterling resumes upside amid improved market mood.
The Fed is expected to cut rates sooner than the BoE.
A recession in the UK economy is highly likely.

The Pound Sterling (GBP) aims for a breakout of volatility contraction amid downbeat US Dollar. The GBP/USD pair remains broadly upbeat as investors hope that the Bank of England (BoE) will start its rate-cut campaign later than the Federal Reserve (Fed) as inflationary pressures in the United States are in a clear downtrend.

Investors continue to channelize liquidity into the Pound Sterling despite deepening fears of a recession in the United Kingdom economy. As per the latest estimates, the British economy contracted by 0.1% in the July-September period. According to the latest projections from the BoE, the economy is expected to remain stagnant in the last quarter this year. The UK economy would be in a technical recession if it contracts again.

Daily Digest Market Movers: Pound Sterling remains upbeat while USD Index extends losses

Pound Sterling strengthens against the US Dollar as easing price pressures in the United States economy have fuelled bets for early rate cuts by the Federal Reserve in 2024.
The Pound Sterling clings to gains, benefitting from the upbeat Retail Sales data for November due to robust sales at non-food retail stores.
Higher discounts by non-food retail stores amid Black Friday sales led to a robust increment in consumer spending.
Monthly Retail Sales recorded a higher 1.3% against the consensus of 0.4% and a stagnant performance in October. Surprisingly, annual sales at retail stores were up by 0.1% while investors forecasted a contraction by 1.3%.
The Pound Sterling continues to hold gains tightly despite deepening fears of a recession in the United Kingdom.
The UK Office for National Statistics (ONS), in its revised estimates, revealed a contraction in the economy of 0.1% in the third quarter of 2023. Earlier, it anticipated a stagnant performance in the same period.
Meanwhile, the Bank of England, in its latest projections, indicated that the economy would remain stagnant in the final quarter of this year.
Last week, the UK’s Finance Minister, the Chancellor of the Exchequer Jeremy Hunt said there is a reasonable chance that the central bank may decide to reduce interest rates if we stay on course and manage to bring down inflation.
On the contrary, BoE policymakers have been stating interest rate cuts would be “premature” in spite of a significant fall in the price index. Stronger wage growth is dampening confidence that inflation is clearly in a downtrend.
Last week, Barclays said that the BoE may initiate its rate cut campaign from May, when it was previously expected from August.
Major factors that are fueling early rate-cut hopes are expectations of a recession in the UK economy and the rare step of the Chancellor Jeremy Hunt suggesting the central bank make rate cuts to boost growth.
Going forward, the market mood is expected to remain quite amid a holiday-truncated week.
The US Dollar Index (DXY) trades near five-month low around 101.46 as a more-than-anticipated decline in the core Personal Consumption Expenditure price index (PCE) for November has pumped bets in favour of early rate cuts by the Fed.
Monthly US core PCE data grew slightly by 0.1% while investors projected a growth rate of 0.2% as recorded for October. On an annualized basis, the underlying inflation has decelerated to 3.2% vs. the consensus of 3.3% and the former reading of 3.5%.
Investors should note that the Federal Reserve (Fed), in its Summary of Projections (SOP) released last week, forecasted core PCE at 3.2% by the year-end.

Technical Analysis: Pound Sterling advances toward 1.2800

Pound Sterling approaches the immediate resistance of 1.2800, being supported by a risk-on mood. The GBP/USD pair demonstrates a Symmetrical Triangle chart pattern formation on an intraday time frame amid the festive season. The formation of the aforementioned chart pattern indicates a sheer contraction in volatility.

On a daily time frame, the Cable is being consistently supported by upward-sloping 20-day Exponential Moving Average (EMA), which trades around 1.2630.

The Relative Strength index (RSI) (14) is on the verge of breaking above 60.00. A bullish momentum would trigger if the RSI manages to do so.

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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