Pound Sterling rallies as Fed-BoE policy divergence set to vanish

Pound Sterling aims to continue recovery as the BoE eyes further policy-tightening.
Andrew Bailey assured that inflation in the United Kingdom will soften to 5% in October.
One-year forward UK consumer inflation expectations and wage growth slow down swiftly.

The Pound Sterling (GBP) climbs sharply near 1.2750, capitalizing on the recovery move, as the market mood starts reviving and the Bank of England (BoE) delivers a hawkish interest rate decision. The GBP/USD pair eyes more gains as the BoE raises interest rates by 25 basis points (bps) to 5.25%, the highest in the past 15 years. The central bank leaves the door open for further policy tightening as inflation is extremely far from the desired rate of 2%.

Andrew Bailey assured that inflation in the United Kingdom will soften to 5% in October as food inflation appeared to be peaking now. While stubborn service inflation could keep persistence in inflation ahead. Meanwhile, an aggressive rate-tightening cycle by the central bank deepens fears of recession as the housing sector and factory activities would face more heat.

Daily Digest Market Movers: Pound Sterling capitalizes on weak US NFP report

Pound Sterling manages to sustain above 1.2700 after a decent recovery as the risk appetite of market participants improves and Bank of England Governor Andrew Bailey leaves the door open for further policy tightening.
On Thursday, the BoE raised interest rates by 25 bps to 5.25% to build more pressure on stubborn inflation. This was the 14th consecutive interest-rate hike.
Out of the nine-member Monetary Policy Committee (MPC), BoE policymaker Swati Dhingra favored a steady interest rate policy. BoE's Haskel and Mann supported a 50 bps interest rate hike.
Andrew Bailey said that the option of a 50 bps interest-rate hike was not in the picture and the central bank will keep interest rates “sufficiently restrictive for a sufficient period” so that inflation returns swiftly to 2%.
In his support, BoE Deputy Governor Ben Broadbent said keeping relatively high rates over an extended period was the key to cutting inflation.
Regarding the inflation outlook, Andrew Bailey is of the view that inflation will come down to 5% by October.
UK Finance Minister Jeremy Hunt said it is encouraging that the BoE thinks UK PM Rishi Sunak will meet his pledge to halve inflation.
Also, a survey from Citi/YouGov showed that 12-month forward consumer inflation expectations dropped sharply to 4.3% vs. former expectations of 5.0%.
Major catalysts behind elevated United Kingdom inflation are labor shortages and sticky food inflation.
Andrew Bailey is of the view that food and drink inflation appears to have peaked while continued strength in services price inflation may suggest that high inflation will persist.
Decision Maker Panel survey conducted on July 7-21 showed that prices charged and wage distribution by businesses would slow down ahead. One-year forward wage growth is seen decreasing to 5.0% in July from 5.3% in June.
Risk-aversion theme loses strength as investors digest Fitch’s downgrade to the United States government's long-term debt rating.
The US Dollar Index (DXY) witnesses correction after facing stiff barricades around 102.80 as investors remain cautious ahead of the US Nonfarm Payrolls (NFP) data.
On Thursday, the US Dollar delivered a power-pack action as the Services PMI failed to match expectations and labor cost growth eased beyond expectations.
While Factor Orders outperformed expectations and May’s reading, indicating a recovery in Manufacturing PMI.
Regarding Federal Reserve (Fed) interest rate guidance, Atlanta Fed Bank President Raphael Bostic thinks an interest rate hike in September is no longer required.

Technical Analysis: Pound Sterling jumps to 1.2750

Pound Sterling bounces back swiftly after sensing decent buying interest near the round-level support of 1.2600. The Cable forms a Hammer candlestick pattern on Thursday that signifies strong interest from buyers considering the asset a value bet. The major still trades below the 20 and 50-day Exponential Moving Averages (EMAs), which indicates that the short and medium-term trend is bearish. The Cable struggles to return to the Rising Channel chart pattern formed on the daily chart.

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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