Pound Sterling remains cushioned ahead of BoE policy

Pound Sterling trades in a bounded region as investors eye BoE monetary policy for further action.
The BoE is expected to keep interest rates unchanged amid easing labor demand and subdued consumer spending.
Deepening Middle East tensions dent demand for risk-sensitive assets.

The Pound Sterling (GBP) struggles to find a direction on Monday as investors await the interest rate decision from the Bank of England (BoE) for further decision-making. The GBP/USD pair trades sideways as the market mood turns quiet, with investors also seeking fresh developments over the Israel-Palestine conflict to take further action.

It is widely expected that the BoE will maintain the status quo on November 2 as subdued consumer spending and labor demand would not allow price pressures to accelerate further, but guidance on where the bank sees the interest rate peak and inflation will be keenly watched. Market participants would like to know if the central bank shares UK Prime Minister Rishi Sunak’s view of halving headline inflation to 5.4% by year-end.

Daily Digest Market Movers: Pound Sterling struggles despite US Dollar corrects

The Pound Sterling is stuck in a tight range around 1.2120 as investors shift focus to the monetary policy meeting by the Bank of England, which will be announced on November 2.
Soft labor demand, poor factory activity, weak consumer spending, and deepening geopolitical tensions are expected to allow BoE policymakers to keep interest rates unchanged at 5.25%.
The policy divergence between the Federal Reserve and the BoE would continue if the latter maintained the status quo.
The UK's labor market is going through a tough phase as firms are not confident about the overall demand due to higher interest rates and stubborn price pressures.
UK employers shed jobs for the third time in a row in the three months to August as they are cutting heavily on workforce and inventory to achieve efficiency.
Data from the UK job search website Adzuna showed that online vacancies and pay offers are falling. The Office for National Statistics (ONS) said its measure of job vacancies fell to a two-year low of 988K in the three months to September.
Apart from the interest rate decision, investors await BoE guidance on the interest rate outlook. The BoE is expected to keep doors open for further policy tightening as inflation is significantly far from the desired rate of 2%.
The doubts over UK Prime Minister Rishi Sunak’s promise of halving inflation to 5.4% by year-end are deepening as energy prices have rebounded due to Middle East tensions.
The market mood remains downbeat as a ground invasion plan by the Israeli army in Gaza would dampen hostage negotiations.
Meanwhile, the US Dollar Index (DXY) trades inside the Friday range, around 106.60, as investors shift focus to the Federal Reserve interest rate decision, which is scheduled for November 1.
Mixed core Personal Consumption Expenditure (PCE) price index data and higher US bond yields are likely to prompt Fed policymakers to keep interest rates unchanged.
Fed policymakers are of the view that higher bond yields have already tightened financial conditions, which would allow the central bank to keep interest rates unchanged in the range of 5.25%-5.50% for the second time in a row.
Apart from the Fed’s monetary policy, investors will focus on the Automatic Data Processing (ADP) Employment Change and ISM Manufacturing PMI data for October.

Technical Analysis: Pound Sterling consolidates above 1.2100

Pound Sterling trades back and forth above the round-level support of 1.2100 as investors await monetary policy decisions by the BoE and the Fed. The broader GBP/USD pair outlook remains bearish as the 50-day and 200-day Exponential Moving Averages (EMAs) are declining. A decisive break below the immediate support of 1.2070 would expose the pair to the psychological support of 1.2000.

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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