Pound Sterling grinds between soft US PPI, escalating Middle East tensions

Pound Sterling experiences a sell-off after mixed UK factory data.
The UK economy is expected to report a technical recession despite 0.3% growth in November GDP.
Investors await the UK labor market and inflation data for further action.

The Pound Sterling (GBP) struggles to sustain against the US Dollar amid deepening tensions in Middle East region, which have dampened market sentiment. US military and its allies have launched airstrikes on Houti rebels as they were warned for attacking merchant vessels flowing from Red Sea. This has escalated fears of oil supply disruptions and entry of Iran between Israel-Hamas war.

While soft United States Producer Price Index (PPI) numbers for December are also impacting the US Dollar's appeal. The monthly headline PPI contracted for the second month in a row by 0.1% against expectations of 0.1% growth and annual PPI rose moderately by 1.0% against 0.8% growth in November. Market participants forecasted the econmic data expanding by higher pace of 1.3%. Producers of core good and services kept prices unchanged at factory gates for second straight month while investors projected them to rose by 0.2%. The annual core PPI softened sharply to 1.8% versus, the estimates of 1.9% and the former reading of 2.0%.

In early Europe, the GBP/USD pair faced a sharp correction as the United Kingdom Office for National Statistics (ONS) reported mixed factory data for November. Monthly growth in the manufacturing sector was slightly higher while annual data failed to match expectations. Overall economic data was slightly better than expectations but seems incapable of taming fears of a technical recession happening in the UK economy.

Going forward, the Pound Sterling will be guided by the labor market and inflation data, which are due to be released next week. Cooling labor market conditions and a further decline in price pressures will deepen hopes of a dovish interest rate outlook from the Bank of England (BoE) in its first monetary policy announcement of 2024 on February 01.

The GBP/USD pair drops despite chances of an interest rate cut from the Federal Reserve (Fed) remain firm even after a sticky United States Consumer Price Index (CPI) report for December.

Daily Digest Market Movers: Pound Sterling drops on dismal market mood

Pound Sterling has surrendered intraday gains due to the United Kingdom ONS reported mixed factory data for November and the market mood has turned risk-averse.
Monthly Manufacturing Production rose by 0.4% against expectations of 0.3% – in October it contracted by 1.2%. On an annual basis, the economic data gained at a slower pace of 1.3% against expectations of 1.7% but significantly outperformed the former reading of 0.2%.
Monthly Industrial Production was up by 0.3% as expected against a contraction of 1.3% in October. The annual factory data surprisingly shrank by 0.1% while investors projected a significant growth of 0.7%. Previously the data point showed a contraction of 0.5%.
Monthly GDP grew slightly higher by 0.3% against the estimates of 0.2%. The UK economy shrank by 0.3% in October.
The economic data is insufficient to give confidence among market participants that the UK economy will dodge a technical recession in the final quarter of 2023.
It will be tough for Bank of England (BoE) policymakers to make choices between higher price pressures and vulnerable economic outlook.
While no discussions have come from BoE policymakers about rate cuts, investors see the central bank lowering borrowing costs this year to avoid ‘over-tightening’ consequences.
Next week, action in the Pound Sterling will be guided by the labor market for November and inflation data for December, which will set an undertone for February’s monetary policy meeting.
UK labor market conditions are cooling swiftly as employers posted 32% less job vacancies in December from a year ago. The Recruitment and Employment Confederation (REC) department said that permanent jobs have declined all over 2023.
The demand for risk-perceived assets has been impacted as Middle East tensions escalate while the US Dollar Index (DXY) turns volatile above 102.30.
Earlier, the USD Index fails to capitalize on stubbornly high inflation data as bets in favour of a rate cut from the Federal Reserve (Fed) remain firm.

Technical Analysis: Pound Sterling struggles above 1.2700

Pound Sterling faces pressure from two-week high around 1.2790 after the release of UK factory data. The broader appeal for the GBP/USD pair is upbeat as 20 and 50-day Exponential Moving Averages (EMAs) are sloping higher. The Cable aims to sustain above the 61.8% Fibonacci retracement at 1.2710 (of the move from 13 July 2023 high at 1.3142 to 4 October 2023 low at 1.2037).

The 14-period Relative Strength Index (RSI) attempts to break above 60.00. A bullish momentum would trigger if the RSI (14) manages to do so.

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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