Pound Sterling bounces back as more interest rate hikes seem warranted
- Pound Sterling rebounds as BoE prepares for further policy tighening.
- The United Kingdom’s outlook turns out bleak as tight policy dampens economic prospects.
- BoE Pill said higher unemployment and lower vacancies would eventually lead to lower wage growth.
The Pound Sterling (GBP) senses an intermediate cushion after a sell-off move from the crucial resistance of 1.2800 as higher interest rates by the Bank of England (BoE) started deepening recession fears. Earlier, the GBP/USD pair drops significantly as higher interest rates are threatening the United Kingdom’s economic outlook. The UK’s strong labor market is loosening its resilience as firms slow down their hiring process amid bleak economic prospects.
An aggressive rate-tightening cycle by the BoE has started affecting the United Kingdom’s housing sector and strong labor market but is building a base for bringing inflation back to 2%. Andrew Bailey seems confident that inflation will soften to 5% by October as the central bank will keep interest rates “sufficiently restrictive for a sufficient period”.
Daily Digest Market Movers: Pound Sterling recovers amid upbeat market mood
- Pound Sterling finds a cushion near 1.2700 despite higher interest rates by the Bank of England started slashing economic prospects.
- The United Kingdom’s economic outlook is under scrutiny as BoE policymakers leave doors open for further policy tightening.
- Last week, the BoE raised interest rates by 25 basis points (bps) to 5.25%. This was the 14th consecutive interest rate hike in the current tightening cycle, and interest rates are their highest in the past 15 years.
- BoE Governor Andrew Bailey commented last week that the central bank will keep interest rates “sufficiently restrictive for a sufficient period” in order that inflation returns swiftly to 2%.
- Andrew Bailey seems confident that inflation will come down to 5% in October, which indicates that UK PM Rishi Sunak would keep his promise of halving inflation this year. The promise was made by Sunak when inflation was at double-digit figures.
- After its monetary policy announcement, BoE chief economist Huw Pill said on Friday that successive interest-rate hikes are cooling the labor market and easing inflationary pressures. He further added that higher unemployment and lower vacancies would eventually lead to lower wage growth.
- An aggressive tightening cycle by the central bank is building pressure on the labor market and housing sector.
- UK firms slowed down permanent staff hiring last month by the most since mid-2020 due to rising concerns about the economic outlook, per a survey by the Recruitment & Employment Confederation (REC) and KPMG, Reuters reported.
- REC Chief Executive Neil Carberry said the jobs market remained "fairly robust" despite the slowdown in permanent placements.
- Meanwhile, the housing sector remains vulnerable as first-time home buyers postpone their purchasing plans to dodge higher interest obligations.
- Market mood is quite cautious as investors await the United States inflation data for July, which will be released on Thursday.
- The US Dollar Index (DXY) climbs above 102.00 as Federal Reserve (Fed) policymakers still hope that more interest rate hikes will bring inflation to 2%.
- Fed Governor Michelle Bowman said over the weekend that the US central bank will raise interest rates further to bring inflation down. She further added that she supported further policy tightening in July amid strong consumer spending, a tight labor market, and still-high inflation.
- Atlanta Fed Bank President Raphael Bostic said the central bank will likely remain restrictive in 2024. About the labor market, the Fed policymaker said July’s employment remains in-line with expectations and he is not surprised that wage growth is still strong.
- Last week, the US Nonfarm Payrolls (NFP) report showed that the labor market got fat with fresh employment of 187K, lower than expectations of 200K but marginally higher than June’s reading of 185K. Unemployment Rate dropped to 3.5% against the estimates and the former release of 3.6%.
- The monthly labor cost index maintained a pace of 0.4% as recorded in June, while investors anticipated a decline in the economic data to 0.3%. Annualized labor cost index also remained stable at 4.4% against expectations of 4.2%.
Technical Analysis: Pound Sterling defends 1.2700
Pound Sterling faces strong selling pressure in an attempt to test the crucial resistance of 1.2800. The Cable senses selling interest after testing the breakdown region of the Rising Channel chart pattern. The asset is trading below the 20 and 50-day Exponential Moving Averages (EMAs), portraying a bearish trend.
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.
