Pound Sterling remains vulnerable on dismal market mood

  • Pound Sterling drops vertically as risk-on rally cools.
  • The BoE may reconsider their restrictive monetary policy stance amid a bleak economic outlook.
  • UK’s business pessimism deepens amid higher interest rates and escalating cost of living crisis.

The Pound Sterling (GBP) searches for a potential cushion after Tuesday’s intense breakdown. The GBP/USD pair was beaten down after investors reconsidered the positive sentiment underpinning the rally in risk-sensitive assets. In addition to that, deepening recession fears and a vulnerable manufacturing sector in the United Kingdom economy have dampened appeal for the Pound Sterling.

A major factor of the outperformance by the Pound Sterling against the US Dollar was the expectation that the Federal Reserve (Fed) would start reducing interest rates earlier than the Bank of England (BoE). However, the UK’s gloomy outlook, due to deepening business pessimism amid escalating cost-of-living crisis, may force BoE policymakers to reconsider their stance of keeping interest rates elevated for a longer period.

Daily Digest Market Movers: Pound Sterling remains on backfoot as US yields recover

  • Pound Sterling finds an interim support slightly above 1.2600 after an intense sell-off. 
  • The GBP/USD pair falls on the backfoot after a sharp recovery in the US Dollar and deepening recession risks in the United Kingdom economy.
  • The UK Office for National Statistics (ONS) reported a contraction in the Gross Domestic Product (GDP) by 0.1% in its latest projections for the third quarter of 2023.
  • The UK manufacturing sector continues to remain vulnerable as the overall demand in the domestic economy and from the overseas market has been dampened due to higher interest rates and a deepening cost of living crisis.
  • On Tuesday, the S&P Global reported a decline in the Manufacturing PMI to 46.2 against the former reading of 46.4. This was the 17th straight month of contraction in the Manufacturing PMI.
  • The S&P Global reported that British employers heavily cut back on inventory and employment, which indicates a gloomy outlook for the manufacturing sector.
  • In addition to that, the Institute of Directors (IOD) Confidence Index reported that the number of business leaders who are pessimistic about the economic outlook have been consistently rising gradually from June. 
  • The agency indicated that businesses are in dire need of a potential boost that could result in a meaningful economic growth in 2024.
  • A vulnerable UK manufacturing sector and deepening recession fears may compel Bank of England policymakers to roll back their tight monetary policy stance and start discussing reducing interest rates.
  • BoE policymakers have been backing higher borrowing costs for a longer period to ensure inflation returns to 2% in a timely manner.
  • Price pressures in the UK economy have decelerated significantly but are still far from the desired rate and are highest among Group of Seven economies.
  • The asset is at a make or a break level as investors shift focus to the crucial US economic data, which will be released this week.
  • A slew of US economic data such as: Manufacturing and Services PMI by the Institute of Supply Management (ISM), job openings and labour market data awaits. 
  • But before that, investors will focus on the Federal Open Market Committee (FOMC) minutes for December’s monetary policy meeting, out on Wednesday at 19:00 GMT.
  • The FOMC minutes will provide a detailed explanation behind the third straight unchanged interest rate decision and guidance on interest rates for 2024.
  • A steep decline in the risk-appetite of the market participants has improved appeal for the US Dollar. The US Dollar Index (DXY) has printed a fresh weekly high slightly above 102.00.

Technical Analysis: Pound Sterling is at make or a break around 1.2600

Pound Sterling discovers nominal buying interest after a sharp decline to near 1.2600. The GBP/USD pair fell vertically after failing to sustain above the round-level resistance of 1.2800. The Cable has formed a Double Top chart pattern on an intraday time frame and a breakdown below the immediate support of 1.2600 will result in a fresh downside. 

On a daily time frame, the GBP/USD pair has dropped below the 20-period Exponential Moving Average (EMA), which indicates that the near-term trend is not bullish anymore.

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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