Pound Sterling turns back and forth as focus shifts to factory activity data

Pound Sterling has turned sideways above 1.2660 as investors are awaiting key US PMI data.
Investors are worried about United Kingdom’s economic prospects as inflation seems stuck above 8.5%.
Financial markets are anticipating that interest rates by the Bank of England would peak around 6.5%.

The Pound Sterling (GBP) is demonstrating a non-directional performance above the crucial support of 1.2660 as United Kingdom's global Manufacturing PMI numbers (June) have outperformed expectations. The economic data jumped to 46.5 versus the expectations and the former release of 46.2. The GBP/USD pair broadly looks well-supported as inflationary pressures in the Britain region are struck above 8.5% and showing no signs of easing despite the restrictive monetary policy.

Investors are shifting their focus toward global PMI numbers to asset the impact of interest rates yet elevated to contain stubborn inflation. Manufacturing PMI in the United Kingdom for June is expected to show stability but would remain in contraction.

Daily digest market movers: Pound Sterling awaits key US Factory PMI

Pound Sterling is likely to remain under pressure ahead of the release of the S&P Global Manufacturing PMI data (June). The economic data is seen steady at 46.2. A figure below 50.0 is considered a contraction.
Higher interest rates by the Bank of England (BoE) are weighing pressure on the economic activities in the United Kingdom as firms are saying “no” to fresh credit to avoid higher interest obligations.
BoE policymaker Silvana Tenreyro is opposing further increases in interest rates as risks having to make a sharp U-turn if it tightens policy anymore. She further added that further policy-tightening is already in the pipeline.
Contrary to Tenreyro, BoE Governor Andrew Bailey supported further interest rate hikes as the UK economy is dealing with more persistent inflation.
In the speech at European Central Bank (ECB) forum, Andrew Bailey drew a distinction between how high rates would go, and how long they would need to stay at their peak.
Financial markets are anticipating that the BoE will raise interest rates to 6.25% from the current state of 5%.
The Guardian reported that the UK and other European powers are expected to announce plans to breach the 2015 Iran nuclear deal for the first time when they confirm they are not going to lift sanctions on Tehran’s use of missiles.
Market mood is quiet as investors have sidelined ahead of the quarterly result season.
The US Dollar Index (DXY) has climbed sharply above 103.00 ahead of the United States ISM Manufacturing PMI data.
Manufacturing PMI is seen expanding to 47.2 vs. the former release of 46.9.
Investors should note that US Manufacturing PMI has been contracting straight for the past seven months and is expected to continue its contracting spell due to higher interest rates from the Federal Reserve (Fed).
Fed Chairman Jerome Powell reiterated that more interest rate hikes are appropriate. He further added that the June pause has bought some time for the central bank to assess monetary policy conditions.
Atlanta Fed Bank President Raphael Bostic stated last week that the central bank has reached a point where interest rates are sufficiently restrictive to bring down inflation to 2%.

Technical Analysis: Pound Sterling balances above 1.2660

Pound Sterling is looking to regain the round-level resistance of 1.2700 after a V-shape recovery from 1.2600. The Cable is being supported by the 200-period Exponential Moving Average (EMA), which indicates that the long-term trend is bullish. The asset is broadly trading in a Rising Channel in which each pullback is considered as buying opportunity for the market participants.

Momentum oscillators are showing exhaustion in the upside momentum, however, the upside bias has not faded yet.

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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