Pound Sterling eyes more downside on persistent inflation outlook

  • Pound Sterling prints fresh six-month low after short-lived pullback as UK slowdown fears remain intact.
  • UK firms cut labor force on inventory backlog due to vulnerable demand.
  • BoE Mann supported further rate-tightening as more inflation shocks remain imminent.

The Pound Sterling (GBP) witnessed a sell-off on Monday after a pullback move and has extended the downside move on Tuesday as investors foresee a slowdown in the United Kingdom’s economy due to economic turmoil. The GBP/USD pair weakened after S&P Global reported the Manufacturing PMI contracted for the 14th time in a row in September as firms underutilized their capacity, cut inventories sharply, and trimmed their workforce amid a poor demand outlook.

While investors think the Bank of England (BoE) is done hiking interest rates after it paused its policy-tightening spell last month to avert recession fears, policymaker Katherine Mann has a different verdict from her teammates. BoE Mann still favors more interest rate hikes and keeps them permanently higher as inflation shocks are likely to be more frequent.

Daily Digest Market Movers: Pound Sterling remains choppy while US Dollar turns volatile

  • Pound Sterling refreshes six-month low near 1.2070 as investors rush to safe-haven assets due to deepening global slowdown fears.
  • The UK economy is failing to cope with the consequences of higher interest rates from the Bank of England.
  • UK factory activities improved marginally in September. S&P Global reported its Manufacturing PMI at 44.3, marginally higher than expectations and the former release of 44.2, but it remains below the 50.0 threshold for the 14th straight period as firms continue to operate on lower capacity due to deteriorating demand.
  • S&P Global said, "The end of the third quarter saw the downturn at UK manufacturers continue. Output, new orders, and employment were all cut back further, amid weaker intakes of new work from both domestic and overseas clients."
  • On Monday, the British Retail Consortium (BRC) reported annual shop price inflation at 6.2%, the lowest since September 2022 and a lower pace than 6.9% in August. This indicates that consumer inflation may continue to fall further as retail demand slows.
  • Investors should note that strong labor demand and higher food inflation were major contributors to the UK’s stubborn inflation. The British labor force has been laid off in the past two months, and food inflation softened significantly from its all-time high of 19.1% to 13.6% in August.
  • While inflation has been progressively easing in the past few months, BoE policymaker Katherine Mann still supports further interest rate hikes ahead. BoE’s most hawkish rate-setter said that interest rates have only just reached restrictive territory.
  • BoE Mann further added that policymakers are facing a “world where inflation shocks are likely to be more frequent” with stronger price growth, meaning interest rates will need to be permanently higher, as reported by Bloomberg.
  • On the UK political front, UK Finance Minister Jeremy Hunt supports freezing the size of the government workforce, which should be followed by a cut that will save 1 billion Pounds. The attempt was made to make peace with his own party’s workers, who actively favor tax cuts.
  • The market mood remains downbeat as European and Asia-Pacific economies are expecting a slowdown due to a poor demand environment.
  • The risk-off market mood improves the appeal of the US Dollar.
  • Investors rushed to the US Dollar after a significant improvement in the US Manufacturing PMI data for September. The Institute of Supply Management (ISM) reported factory activities at 49.0 against estimates of 47.7 and the August reading of 47.6.
  • Despite a strong rebound, the Manufacturing PMI failed to climb above the 50.0 threshold, which indicates that contraction in manufacturing continues.
  • Meanwhile, the US Dollar Index (DXY) turned volatile near a fresh 10-month high at 107.21 after upbeat US JOLTS Job Openings data. In August, employers posted 9.61 million job vacancies against expectations of 8.8 million.

Technical Analysis: Pound Sterling consolidates 1.2070

The Pound Sterling faced an intense sell-off on Monday after slipping below Friday’s low of 1.2180 as it resulted in an activation of the Gravestone Doji candlestick pattern. The GBP/USD pair refreshed its six-month low near 1.2070 and is expected to continue the downside spree. Declining 20 and 50-day Exponential Moving Averages (EMAs) indicate that the short-term trend is bearish. Momentum oscillators continue to trade on a bearish trajectory.

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.

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