- Pound Sterling discovers buying interest near 1.2760 as investors' risk appetite rebounds.
- United Kingdom authority remains concerned about economic growth due to aggressive policy tightening by BoE.
- Rising cost pressures, uncertain demand outlook, and tight credit policy build pressure on Pound Sterling.
The Pound Sterling (GBP) recovers as negative market sentiment eases despite the United Kingdom losing resilience in an aggressively restrictive monetary policy environment. Earlier, the GBP/USD pair faced wrath as the UK authority shows concerns about deepening recession fears due to consistent interest rate hikes by the central bank.
Higher inflation and restrictive interest rate policy elevate the burden on United Kingdom households as their real income squeezes sharply. Britain’s housing sector, retailers, and factories are going through turbulent times due to rising borrowing costs and uncertain forward demand. Despite restrictive factors, the BoE is preparing to raise interest rates further to achieve price stability.
Daily Digest Market Movers: Pound Sterling resumes upside journey
- Pound Sterling delivers recovery from below 1.2800 as the United Kingdom economy loses resilience due to the aggressive interest rate policy by the Bank of England.
- UK’s housing sector, factory activities, and retail orders have come under pressure due to the heavy burden of higher inflation and soaring interest rates.
- Inflation in Britain softened beyond expectations in June but a one-time decline is insufficient to infuse optimism among households.
- A survey by the UK's Royal Institution of Chartered Surveyors (RICS) on Wednesday showed that 68% of respondents believe that the housing sector has turned vulnerable in the face of higher borrowing costs.
- The Confederation of British Industry (CBI) reported its monthly balance of retail sales, which compares volumes with a year ago, which fell to -25 in July from -9 in June, Reuters reported. CBI economist Martin Sartorius said cost pressures, a tight labor market, and rising interest rates, alongside uncertain demand conditions, make the current environment difficult to navigate for retailers."
- On Thursday, UK Treasury advisers to UK Finance Minister Jeremy Hunt flagged concerns about deepening recession fears due to aggressive policy-tightening by the BoE.
- The seven-member Economic Advisory Council is of the view that the central bank should slow down its rate-hiking spree, which is the fastest in three decades, as some economic indicators suggest a potential slowdown ahead for the economy.
- In spite of deepening recession fears, BoE policymakers cannot pause the rate-hiking spell as current inflationary pressures are four times the desired rate of 2%. Meanwhile, a significant recovery in oil prices has stemmed fears of a rebound in global inflation.
- The BoE prepares to raise interest rates by 25 basis points (bps) to 5.25% at its policy meeting scheduled for August 3. This will be the 14th consecutive interest rate hike by the UK central bank.
- Market participants anticipate that interest rates in the UK would peak around 5.75%.
- Investors seem baffled whether UK PM Rishi Sunak will fulfill his promise of halving inflation to 5% by year-end.
- The US Dollar Index (DXY) turns back-and-forth after a rally to near 101.80 as the United States economy performed surprisingly better in the second quarter than expected.
- US Gross Domestic Product (GDP) expanded at a higher pace of 2.4% vs. 2.0% for the first quarter. Investors were expecting that GDP expanded at 1.8% on an annualized basis.
- Durable Goods Orders data for June rose by 4.7% against expectations of 1.0% and May’s figure of 1.8%.
- For the week ending July 21, jobless claims for the first time rose by 221K, lower than expectations of 235K.
- After an interest rate hike to 5.25-5.50%, the Federal Reserve confirmed that September’s monetary policy would be data-dependent.
- Resilience in the US economy along with tight labor market conditions could force the Fed to continue the rate-hiking spell.
Technical Analysis: Pound Sterling moves towards1.2900
Pound Sterling prints a fresh fortnight low at 1.2763 as the market mood turns cautious. The Cable fails to sustain above the 20-day Exponential Moving Average (EMA) at 1.2858 and is declining toward the 50-day EMA, which is trading around 1.2740. The asset declines toward the lower portion of the Rising Channel chart pattern formed on a daily period, which could be bought by market participants.
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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