Pound Sterling dives as investors seeks clarity for BoE's interest rate peak

Pound Sterling is under pressure as BoE Bailey is expected to deliver hawkish remarks.
United Kingdom government is adding measures beyond monetary tools in the inflation-control toolkit.
Wage cuts for public sector employees would put more burden on households amid higher inflationary pressures.

The Pound Sterling (GBP) has displayed a vertical fall as investors are worried that the continuation of policy tightening by the Bank of England (BoE) would further dampen the economic outlook of the United Kingdom. The GBP/USD pair is going through a rough phase as more interest rate hikes by the BoE are reasonable considering that UK’s inflation is showing no signs of softening.

The speech from BoE Governor Andrew Bailey will remain in focus as investors are keen to know the consequences of higher interest rates on the United Kingdom economy and cues about the interest rate guidance. In comparison with developed economies, inflationary pressures in the British economy are extremely persistent and investors are losing their confidence in BoE policymakers and government.

Daily digest market movers: Pound Sterling dives as market mood turns soar

Investors are awaiting the speech from Bank of England Governor Andrew Bailey for interest rate guidance.
The latest survey of 52 economists by Reuters showed that the Bank of England will raise borrowing costs 50 bps higher than was thought only two weeks ago, in two quarter-point moves, as elevated inflation proves trickier to bring down than had been expected.
United Kingdom government has started looking beyond monetary policy measures as May’s Consumer Price Index (CPI) turned out more persistent than anticipated.
UK FM Jeremy Hunt has urged industry regulators not to elevate profit margins by taking benefit of resilient demand.
In addition to freezing corporate profits, wage cuts in the public sector are also under consideration as lower cash for disposal would release some heat from resilient demand.
The image of the Conservative Party is in danger as wage cuts for public sector employees would put the burden on households in offsetting higher price pressures.
May’s inflation was higher than expected as the impact of lower gasoline prices was neutralized by higher prices for second-hand automobiles.
Core CPI printed a fresh high at 7.1% and made UK PM Rishi Sunak uncomfortable as he promised to halve inflation by year-end.
Stubborn inflation was followed by a fat rate hike of 50 basis points (bps) from the Bank of England to 5%.
The Pound Sterling has been underperforming as stick inflationary pressures are threatening the economic outlook of the British economy.
Market sentiment has turned negative as investors are awaiting the speech from Federal Reserve (Fed) chair Jerome Powell for the interest rate guidance.
As per the CME Fedwatch tool, around 77% chances are in favor of a 25 bp interest rate hike in July to 5.25-5.50%.
The Upbeat United States Durable Goods Orders data showed promising signs of recovery in the manufacturing sector.
US Census Bureau reported that Durable Goods Orders expanded by 1.7% while the street was anticipating a contraction of 1%. May’s Durables data has outperformed April’s figure of 1.2%.
The US Dollar Index has refreshed its day’s high at 102.70 amid the risk-aversion theme.

Technical Analysis: Pound Sterling drops sharply below 1.2700

Pound Sterling delivered a steep fall after forming a Double Top chart pattern on an hourly scale around 1.2848. The Double Top pattern would be activated if the Cable surrender the round-level support of 1.2700. This would mark an activation of a bearish reversal and the US Dollar bulls might get in the driving seat.

Only a recovery move above the recent high of 1.2848 would give an upper hand to the Pound Sterling bulls. Momentum oscillators are demonstrating a non-directional performance.

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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