Pound Sterling recovers as risk sentiment revives
- Pound Sterling faces a sell-off as the bellicose situation between Israel and Hamas dampens the market mood.
- UK’s manufacturing and construction activities are going through a vulnerable phase due to higher mortgage rates.
- BoE Bailey remains confident that inflation will come down to 5% or below by year-end.
The Pound Sterling (GBP) corrected on Monday following a short-lived pullback as the Israel-Hamas conflict that began over the weekend strengthened the risk-aversion theme. The GBP/USD pair dropped sharply as the Federal Reserve (Fed) is expected to keep one more interest rate hike in consideration, while the Bank of England (BoE) may keep interest rates unchanged to phase out fears of a recession in the United Kingdom’s economy.
In the tussle against persistent inflationary pressures, the UK’s economic prospects are losing their resilience as the demand outlook deteriorates. UK firms are reluctant to raise funds at higher borrowing costs, which has reduced labor demand and overall output. The situation is expected to remain vulnerable for a longer period as the BoE vowed to keep interest rates restrictive until inflation comes down to 2%.
Daily Digest Market Movers: Pound Sterling recovers as investors' risk-appetite improves
- Pound Sterling extends correction below crucial support at 1.2200 as the market mood has become quite risk-off in nature due to the Israel-Hamas war.
- The broader market mood is downbeat as the Israel-Hamas conflict could suck in foreign players, which could lead to a global conflict.
- The war began with the Palestinian military group Hamas invading Israel on the morning of October 7 in an unprecedented attack.
- The GBP/USD pair recovered for three trading sessions in a row last week after finding buying interest near 1.2050 as Bank of England policymakers were confident about achieving price stability.
- BoE Governor Andrew Bailey said last week that inflation could come down to 5% or below by year-end. This indicates that UK Prime Minister Rishi Sunak would be able to fulfill his promise of halving inflation to 5.2% by the end of 2023.
- BoE policymaker Ben Broadbent sees the achievement of price stability in two years. He further added that there are “clear signs” that higher interest rates have hit demand and elevated the Unemployment Rate.
- Higher interest rates have dampened the UK’s Manufacturing and Construction PMI significantly in September. S&P Global reported the UK Construction PMI at 45.0 in September, much lower than expectations of 49.9 and the former release of 50.8. A figure below the 50.0 threshold is considered a contraction.
- Going forward, investors will focus on the UK’s Financial Policy Committee (FPC) meeting minutes, which will be released on Tuesday at 09:30 GMT. The FPC is an official committee of BoE that monitors macroeconomic and financial issues, that could impact long-term growth prospects of the UK economy.
- This week, UK factor activity data for August will be keenly watched. The Industrial and Manufacturing Production data are expected to continue the contraction spell but at a slower rate.
- The US Dollar Index (DXY) recovered after correcting to near 106.00, supported by cautious market sentiment and rising expectations of one more interest rate increase from the Federal Reserve (Fed) after an upbeat Nonfarm Payrolls (NFP) report for September.
- The US labor force witnessed 336K fresh jobs last Friday, much higher than estimates of 170K and the former release of the upwardly-revised 227K. The Unemployment Rate remains steady at 3.8%, nominally higher than expectations of 3.7%.
- The monthly wage rate grew by 0.2% but lower than expectations of 0.3%. The annualized wage rate decelerated to 4.2% vs. the estimates and the former release of 4.3%.
- The US economy has been resilient due to tight labor market conditions, robust consumer spending, and a revival in factory activities. This could keep the last leg of inflation sticky and elevate expectations of further policy-tightening.
- The US Dollar is expected to remain volatile this week as investors will focus on the consumer inflation data for September, which will be released on Thursday.
Technical Analysis: Pound Sterling recovers above 1.2200
Pound Sterling finds buying interest after facing selling pressure after sensing barricades near the immediate resistance of 1.2250. The appeal for the GBP/USD pair remains poor as market sentiment remains downbeat, and investors are worried about the UK’s economic prospects. The broader GBP/USD outlook dampens as the 50 and 200-day Exponential Moving Averages (EMAs) have delivered a Death Cross, which warrants more downside. Potential support is placed around 1.2000.
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.
