Pound Sterling prints a fresh three-week low amid cautious sentiment ahead of BoE


  • Pound Sterling struggles to keep recovery intact as the BoE prepares for further policy tightening.
  • Inflation in the United States economy is highest among G-7 economies.
  • The BoE could consider a second consecutive 50 bps rate hike so that inflation returns to 2% swiftly.

The Pound Sterling (GBP) remained subdued on Wednesday as investors await the interest rate decision by the Bank of England (BoE), which will be announced on Thursday. The GBP/USD pair attempts a recovery move after retracing more than 60% from its July high as one league of investors believes that the central bank could remain hawkish beyond expectations.  

Inflation in the United Kingdom economy is the most stubborn among G-7 economies, therefore, the central bank doesn’t have the luxury of keeping the rate-tightening cycle steady to buy some time for an overall economic assessment. In addition to the pace of hiking interest rates by the BoE, investors would gauge cues about the interest rate peak and inflation outlook.

Daily Digest Market Movers: Pound Sterling delivers vertical fall ahead of BoE policy

  • Pound Sterling rebounds from 1.2750 as the Bank of England (BoE) looks set to raise interest rates further. 
  • An interest rate hike of 25 bps has already been discounted by market participants. The Pound Sterling could see immense strength if BoE turns out more hawkish than expected.
  • One school of thought also believes that BoE policymakers could consider a 50 bps interest rate hike consecutively for the second time as inflationary pressures in the United States economy are stubborn among G7 economies.
  • UK’s headline Consumer Price Index (CPI) softened to 7.9% in June while core inflation is marginally lower than its 31-year peak of 7.1% at 6.9%. A series of interest-rate hikes is probably required so that inflation returns to 2%.
  • Investors are worried as further policy-tightening by the BoE will deepen recessionary fears significantly.
  • UK’s housing sector and factory activities face the wrath of the BoE raising interest rates aggressively.
  • Britain’s mortgage lender Nationwide reported on Tuesday that housing prices fell by most in July, since 2009 on an annual basis. The reason behind the decline in housing demand is the lower affordability power of first-time buyers due to higher borrowing costs.
  • On Tuesday, S&P Global reported the lowest Manufacturing PMI reading for this year at 45.3 in July vs. June’s figure of 46.5. UK factory activities are consistently contracting due to weak overseas demand and firms with higher backlogs as households ditch purchases of big-ticket items.
  • After Thursday’s interest rate decision by the BoE concerns about faltering manufacturing activities could elevate further.
  • Apart from the interest rate decision, guidance about the rate peak and inflation outlook from the BoE will be in focus.
  • Last week, Reuters reported that interest rates in the UK region could peak around 5.75%.
  • The market mood is quite cautious as FITCH downgraded the United States economy. The reasoning behind the rating downgrade is the higher fiscal spending in the economy in upcoming years.
  • The US Dollar Index (DXY) prints a fresh three-week high above 102.40 as US labor data remains better than expectations.
  • US Automatic Data Processing (ADP) for July reported the addition of fresh private payrolls by 324K vs. expecattions of 189K..
  • On Tuesday, the US Dollar rebounded despite July’s JOLTS Job Openings and Manufacturing PMI missing estimates.

Technical Analysis: Pound Sterling extends downside below

Pound Sterling discovers support after a three-week correction near 1.2750. The Cable attracts bids after testing the 50-day Exponential Moving Average (EMA) and the lower portion of the Rising Channel chart pattern. The short-term trend turns bearish as the asset has slipped below the 20-day EMA while the long-term trend is still bullish. The Pound Sterling retraces more than 61.8% from its July high of 1.3140.

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.

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.

 

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Recommended content


Recommended content

Editors’ Picks

EUR/USD stays below 1.0700 after upbeat US PMI data

EUR/USD stays below 1.0700 after upbeat US PMI data

EUR/USD stays on the back foot and trades in negative territory below 1.0700 as the US Dollar benefits from upbeat data in the American session. S&P Global reported that the economic activity in the US private sector continued to expand at a robust pace in June.

EUR/USD News

GBP/USD drops to fresh multi-week low below 1.2650

GBP/USD drops to fresh multi-week low below 1.2650

GBP/USD remains under bearish pressure and trades at its lowest level since mid-May below 1.2650. The stronger-than-forecast Manufacturing and Services PMI data from the US helps the USD hold its ground and causes the pair to stretch lower.

GBP/USD News

Gold drops below $2,340 as US yields rebound

Gold drops below $2,340 as US yields rebound

Gold loses its traction and trades deep in the red below $2,340 in the second half of the day on Friday. The benchmark 10-year US Treasury bond yield pushes higher following the upbeat PMI data from the US, weighing on XAU/USD.

Gold News

Bitcoin retraces to crucial support

Bitcoin retraces to crucial support

Bitcoin price encounters resistance at weekly highs before retracing to seek support at a crucial level, while Ethereum and Ripple align closely with Bitcoin's movements, gearing up to surpass resistance barriers and embark on upward rallies.

Read more

Week ahead – US PCE inflation the highlight of a relatively light agenda

Week ahead – US PCE inflation the highlight of a relatively light agenda

Core PCE inflation to test bets of two Fed rate cuts in 2024. Yen awaits BoJ Summary of Opinions, Tokyo CPI. Canadian CPI data also enters the spotlight.

Read more

Forex MAJORS

Cryptocurrencies

Signatures