Pound Sterling revives as Fed-BoE policy divergence set to widen
- Pound Sterling revives as investors hope that Fed-BoE policy divergence will neutralize this month.
- United Kingdom's housing sector and factory activities are under pressure due to higher interest rates.
- BoE’s Broadbent warned that interest rates will remain higher for a longer period.
The Pound Sterling (GBP) recovered strongly on Tuesday on hopes that an interest rate hike of 25 basis points (bps) by the Bank of England (BoE) at its September monetary policy meeting will neutralize the Federal Reserve-BoE divergence. The revival move in the GBP/USD pair faded as further policy tightening by the BoE will dampen the economic outlook.
The consequences of restrictive monetary policy by the United Kingdom's central bank have widened their scope to housing and the manufacturing sector. Firms are underutilizing their entire production capacity as forward demand seems poor due to rising prices. While nuclear families have postponed their home-buying plans to avoid higher installment obligations. UK inflationary pressures continue to remain persistent despite soft fuel and energy prices.
Daily Digest Market Movers: Pound Sterling recovers losses on soft US data
- Pound Sterling revives despite the widening consequences of elevated inflationary pressures.
- UK currency drops swiftly despite hopes that the Fed-BoE policy divergence will neutralize this month.
- Investors are hoping that the Fed will keep its interest rates steady at 5.25-5.50% while the BoE is expected to raise interest rates consecutively for the 15th time. Investors are projecting a 25 basis point (bps) interest rate hike, which will push rates to 5.50%.
- Strength in the Pound Sterling is hollow as backed by expectations of neutralized Fed-BoE policy divergence. Sterling bulls could lose their strength if the consequences of restrictive monetary policy start multiplying.
- BoE Deputy Governor Ben Broadbent warned that interest rates will remain higher for a longer period. He further added that inflation will not fade as quickly as it emerged despite soft energy prices.
- The UK’s housing sector, factory activities, and hiring momentum are slowing significantly due to the historically aggressive rate-tightening cycle by the BoE.
- Home sellers have lowered prices as buyers postponed their residential investment plans to avoid higher installment obligations.
- Meanwhile, UK firms continue operating at lower capacity due to a bleak demand outlook. The potential risk of corporate default rises due to contracting debt-service coverage ability.
- Also, firms have slowed down their recruitment processes as higher interest rates have threatened economic prospects. However, the wage growth is extremely strong, which indicates that firms are favoring talent retention rather than fresh acquisitions.
- UK PM Rishi Sunak opens for a face-to-face meeting with Chinese leader XI Jinping at the G20 summit to improve diplomatic relations with China. However, XI Jinping has not confirmed his arrival.
- The US Dollar Index attempts a recovery but remains constrained as investors await the Employment Change data from ADP That data will be published on Wednesday at 12:15 GMT. As per expectations, the US labor market is expected to witness the fresh addition of 195K new jobs in August vs. former additions of 324K.
- The impact of the August labor market data will be higher as Fed Chair Jerome Powell confirmed in his commentary at the Jackson Hole Symposium that the central bank will remain data-dependent for further policy action.
- The United States Bureau of Labor Statistics reported significantly lower fresh Job Openings in July. US firms invited fresh applications for 8.827M vacancies against June’s reading of 9.165M while investors anticipated 9.465M openings. This indicates that the hiring process has slowed down.
- Later this week, the focus will be on official labor market data and ISM Manufacturing PMI for August, which will provide a base for September’s monetary policy.
Technical Analysis: Pound Sterling climbs back above 1.2600
Pound Sterling faces an intense sell-off near 1.2630 after a recovery move from 1.2550 as the market mood dampens. The recovery move in the Pound Sterling was not backed by any strong economic trigger, therefore, the move faded now. The 20 and 50-day Exponential Moving Averages (EMAs) have delivered a bearish crossover, which indicates that the overall trend is bearish. The Cable is expected to find support near the 200-day EMA, which trades around 1.2483.
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.
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.
