Pound Sterling remains sluggish as spotlight shifts to Q2 GDP

Pound Sterling surrenders gains as more interest rate hikes from the BoE are in the pipeline.
United Kingdom factory activities will be keenly watched this week.
UK PM Rishi Sunak might justify his promise of easing inflation to 5% by year-end.

The Pound Sterling (GBP) fails to keep recovery intact as more interest rate hikes from the Bank of England (BoE) are highly required. The GBP/USD pair discovers buying interest as the United Kingdom inflation is expected to remain well above 2% for the next four years. As the central bank is failing to achieve price stability sooner, further policy tightening cannot be ruled out.

This week, the UK manufacturing sector for June will be under scrutiny. The performance of British factories and preliminary GDP for the April-June quarter will be watched closely as the policy environment is highly restrictive and observers wonder if the economy will manage to avoid a recession. Meanwhile, claims from BoE Pill and the National Institute of Economic & Social Research (NIESR) indicate that UK PM Rishi Sunak will fulfill his promise of easing inflation to 5% by the end of 2023.

Daily Digest Market Movers: Pound Sterling surrenders against sour market mood

Pound Sterling surrenders gains after facing resistance around 1.2750 as the risk-appetite theme fades and expectations of more interest rate hikes from the Bank of England.
United Kingdom’s inflation is expected to remain elevated due to labor shortages as individuals choose early retirement.
Lack of availability to fill higher vacancies would keep the wage growth pace stable ahead. NIESR forecasts that wage growth to hold at 6% next year as well as this year
Prediction from NIESR showed that the UK inflation will fall to 5.3% by the year-end but the BoE would fail to return inflation to 2% before 2028.
Contrary, BoE policymaker Huw Pill said that inflation will fall to 5% this year and the central bank will achieve price stability in the first half of 2025.
The statement from Huw Pill and the NIESR forecast indicates that UK PM Rishi Sunak would meet his promise of halving inflation in 2023. Rishi Sunak made this promise when inflation was in the double digits.
NIESR predicted that British economic output is not on track to return to its pre-pandemic peak until late 2024, representing zero growth over a five-year period.
A tight labor market and resilience in consumer spending might allow the British economy to avoid recession this year.
This week, the Pound Sterling will dance to the tune of the preliminary Q2 Gross Domestic Product (GDP) and factory activities data.
Per estimates, the monthly GDP for June expanded at a pace of 0.2% against a contraction of 0.1%. On a quarterly basis, GDP is expected to deliver a stagnant performance, and the annual growth rate is expected to remain stable at 0.2%.
Monthly Industrial and Manufacturing Production are expected to expand by 0.1% and 0.2% respectively.
The market mood turns positive as investors digest caution ahead of the United States Consumer Price Index (CPI) data, which will be published on Thursday at 12:30 GMT.
US inflation is expected to rebound after a series of decelerations as global oil prices rebound strongly.
The US Dollar Index (DXY) corrects sharply to near 102.40 as Philadelphia Fed Bank President Patrick Harker delivers a neutral commentary on the interest rate outlook. Fed Harker said the central bank is at the point where it can be patient and hold rates steady and let the monetary policy actions do their work.

Technical Analysis: Pound Sterling needs to sustain above 1.2700 to avoid casualty

Pound Sterling bounces back sharply and jumps to 1.2750 after discovering strength near the round-level support of 1.2700. The Cable moves higher but stays inside the restricted territory ahead of the release of crucial economic indicators. On a broader note, the asset seems vulnerable, consolidating near the 50-day Exponential Moving Average (EMA).

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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