Pound Sterling exposes to more losses due to deepening global risks

Pound Sterling surrenders recovery amid cautious market mood.
UK Hunt assured that the administration is on track to bring down inflation to almost 5% by year-end.
S&P Services PMI increased to 49.5 vs. estimates of 48.7 but remains below the 50.0 threshold.

The Pound Sterling (GBP) faces immense selling pressure and prints a fresh 11-week low due to the active risk-aversion theme. The GBP/USD pair is reeling from the Bank of England’s (BoE) aggressive policy of raising interest rates, which is threatening the economic outlook. Investors believe that the global economy will shift into a recession if central banks continue to tighten monetary policy.

The UK economy is expected to remain vulnerable as the BoE could be the laggard in pausing the policy tightening spell. Britain’s Consumer Price Index (CPI) is the highest among G7 economies, which warrants more rate hikes ahead. However, UK Finance Minister Jeremy Hunt assured the public that the administration is on track to bring down inflation to almost 5% by year-end.

Daily Digest Market Movers: Pound Sterling weakens on cautious market mood

Pound Sterling skids below the crucial support of 1.2600 as investors worry that the UK economy could shift into a recession, knowing that the Bank of England (BoE) will raise interest rates further.
The BoE is not yet in a position to pause the policy tightening and announce a victory over persistent inflationary pressures.
UK core inflation is close to its all-time peak of 7.1% despite the BoE having already raised interest rates to 5.25%. The headline inflation has decelerated less in response to softening energy and fuel prices.
Market participants expect that the BoE will raise interest rates further at the September meeting. This would be the 15th straight interest rate hike in which the central bank is expected to raise rates by 25 basis points (bps) – this time to 5.50%.
UK housing and factory activities have remained under pressure due to higher interest rates by the BoE.
First-time home buyers postponed their investments to avoid higher interest obligations. Firms cut spending on fresh hiring and inventories in order to focus on operating efficiently in a deteriorating demand environment.
UK Finance Minister Jeremy Hunt said over the weekend that the administration is on track to bring down inflation to almost 5% by year-end.
British authorities’ focus on halving inflation is expected to disappoint members of the ruling Conservative Party, who lobbied heavily for tax cuts before elections.
Barclays report on UK consumer spending showed that spending remained muted in August despite the regular public flocking to cinemas amid the release of the films Barbie and Oppenheimer.
The report from Barclays also showed that the annual growth in consumer spending on credit and debit cards slowed to 2.8% from July’s reading of 4.0%.
Meanwhile, S&P Services PMI increased to 49.5 vs. estimates of 48.7 but remains below the 50.0 threshold.
The market mood turns cautious as investors expect that higher interest rates from central banks in developed nations would be more challenging for emerging markets due to rising geopolitical fragmentation.
The US Dollar Index (DXY) prints a fresh three-month high near 104.50 despite rising hopes of a pause in the policy tightening by the Federal Reserve (Fed).
As per the CME FedWatch Tool, there is as much as a 60% chance that interest rates will remain unchanged at 5.25%-5.50% by year-end.
After steady labor growth and factory activities, investors shifted their focus to the US ISM Services PMI for August, which will be released on Wednesday. The PMI is expected to be broadly steady at 52.

Technical Analysis: Pound Sterling exposes to 1.2500

Pound Sterling retreats after facing selling pressure above the round-level resistance of 1.2600. The Cable drops vertically as market sentiment turns bearish. A decisive break below the September 1 low at 1.2577 will trigger a breakdown of the Inside candle chart pattern. The 20 and 50-day Exponential Moving Averages (EMAs) have already delivered a bearish crossover. The asset is declining toward the 200-day EMA, which trades below 1.2500.

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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