Pound Sterling eyes stability above 1.21 as US Dollar turns volatile
- Pound Sterling dips after choppy moves ahead of S&P Global Services PMI data.
- UK’s Services PMI is set to contract for the second time in a row.
- The BoE paused the policy-tightening spell, while inflation is still more than thrice the desired rate of 2%.
The Pound Sterling (GBP) attracts bids amid a correction in the US Dollar after weaker-than-anticipated US ADP Employment Change data and a rebound in the UK's Services PMI data. S&P Global reported UK Services PMI at 49.3, higher than expectations and the former release of 47.2. The economic data failed to capture the 50.0 threshold for the second time in a row but managed to improve the appeal for the Pound Sterling.
Despite a recovery in the Services PMI data, the outlook remains vulnerable amid higher borrowing costs due to tight monetary policy by the Bank of England (BoE) and a weak order book due to subdued economic conditions. British producers have cut back on new orders and labor due to tepid demand. Rising oil prices and supply chain disruptions could push the UK economy further on the backfoot.
The commentary from BoE Governor Andrew Bailey about progress in declining inflation to 5% also boosted appeal for the Pound Sterling. Andrew Bailey opposed changing the UK’s 2% inflation target and sees inflation declining to 5% or less this year.
Earlier, The GBP/USD pair faced a ruthless sell-off as the United Kingdom economy muddled against the headwinds of poor economic prospects and sticky inflation. UK inflation is still more than thrice the target rate of 2%, and the Bank of England feels discouraged about raising interest rates further due to deepening recession risks.
Daily Digest Market Movers: Pound Sterling struggles to extend recovery
- Pound Sterling recovers after defending the crucial support of 1.2050 on upbeat Services PMI for September and improved risk profile.
- UK economic activities are consistently facing the wrath of higher interest rates. Firms seem fully pessimistic about the economic outlook due to declining domestic and overseas demand.
- This week, the UK Manufacturing PMI extended its contracting spell for its 14th straight period as firms cut back output, new orders, and employment amid deteriorating demand.
- While the UK economy is struggling for a firm footing due to economic turmoil, higher inflation is still a concern for Bank of England policymakers despite raising interest rates to 5.25%.
- The majority of BoE policymakers favor an unchanged interest rate decision in September, while Katherine Mann sees monetary policy as not sufficiently restrictive to bring down inflation to 2%.
- BoE Mann further added that policymakers are facing a “world where inflation shocks are likely to be more frequent” with stronger price growth, meaning interest rates will need to be permanently higher.
- Amidst all negative headlines about the UK’s economic prospects and sticky inflation, the British Retail Consortium (BRC) reported that food price inflation fell for the fifth month in a row to a single-digit annualized rate of 9.9% from 11.5%.
- BRC Chief Executive Helen Dickinson said we expect shop price inflation to continue to fall over the rest of the year but warned that rising oil prices, a global shortage of sugar, and supply disruptions due to the war in Ukraine could dampen the trend.
- On the global trade front, Business & Trade Minister Kemi Badenoch said at the Conservative Party conference that there was "zero" chance of a free trade agreement with the United States under President Joe Biden's administration, as reported by Reuters.
- The market mood improved after the United States ADP agency reported the Employment Change data at 89k, almost halved from August. Private payrolls were expected to increase by 153K.
- This has improved hopes for a neutral interest rate decision from the Federal Reserve (Fed) for its November monetary policy.
- The US Dollar Index (DXY) corrects to near 106.60 after soft labor market data.
- In August, US JOLTS Job Openings data remained upbeat. Employers posted 9.61 million job vacancies against expectations of 8.8 million.
Technical Analysis: Pound Sterling aims stability above 1.2100
Pound Sterling finds buying interest after trading directionless near a six-month low around 1.2070 as the risk appetite of the market participants improves. The GBP/USD pair outlook remains vulnerable as the 50 and 200-day Exponential Moving Averages (EMAs) are on the verge of delivering a Death Cross. The Cable is expected to decline further toward the psychological support of 1.2000. Momentum oscillators are trading in a bearish trajectory, warranting more weakness ahead.
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.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
