Pound Sterling faces mild pressure despite US PPI follows footprints of soft inflation
- Pound Sterling has sensed a mild sell-off after printing a high of 1.3080.
- United Kingdom’s manufacturing activities are facing pressure from higher interest rates by the BoE.
- Britain’s monthly Industrial and Manufacturing Production have contracted by 0.6% and 0.2% respectively.
The Pound Sterling (GBP) has climbed to 1.3080, continuing its five-day winning spell despite the rising burden of higher interest rates by the Bank of England (BoE) on the United Kingdom’s manufacturing sector. The GBP/USD pair has been filled with an adrenaline rush as the market mood has turned extremely cheerful, and the BoE is expected to continue its policy-tightening spell in spite of building pressure on the economic outlook.
United Kingdom’s Industrial and Manufacturing Production are contracting as firms are avoiding making applications for fresh credit to dodge higher interest obligations. Subdued manufacturing activities and rising jobless claims are meaningful signs of the heavy burden of aggressive interest rate hikes by the Bank of England.
Daily Digest Market Movers: Pound Sterling eyes more gains amid risk-on impulse
- United Kingdom’s Office for National Statistics has reported a contraction in monthly Gross Domestic Product (GDP) May figures by 0.1% against the consensus of a 0.3% contraction. In April, monthly GDP expanded by 0.2%.
- Monthly Industrial Production surprisingly contracted heavily by 0.6% vs. expectations of 0.4% contractions and the prior release of -0.2%. Annualized economic data has matched expectations of a 2.3% contraction.
- Manufacturing Production has landed better than expectations but remains in a contraction phase. This economic indicator has been recorded at -0.2% against estimates of -0.5% and the prior release of -0.1%. Also, annual figures remained well-better than expectations but weaker than the previous figure.
- The burden of higher interest rates by the Bank of England is visible in the manufacturing sector.
- This week, Britain’s employment report came full of surprises. Three-month Unemployment Rate jumped to 4.0% against the estimates and the former release of 3.8%.
- Jobless claims rose by 25.7K in June against a decline of 22.5K reported in May as firms said no to fresh credit to avoid high-interest rate obligations.
- Policymakers at the Bank of England (BoE) got uncomfortable after three-month Average Earnings excluding bonuses (May) maintained the pace at 7.3% while investors were anticipating a decline to 7.1%.
- Steady wage pressures were sufficient to offset the cool down in the labor market report and kept the chances of continuation of the policy-tightening spell elevated.
- UK’s Royal Institution of Chartered Surveyors (RICS) has reported that new buyer inquiries for the property have slowed sharply. Higher borrowing costs charged by commercial banks in a highly-inflated environment are making the real estate sector vulnerable.
- In a press conference on Wednesday, Bank of England Governor Andrew Bailey conveyed, "The UK economy and financial system have so far been resilient to interest rate risk," as reported by Reuters.
- The Bank of England has already raised interest rates to 5% and financial markets are expecting that interest rates will peak around 6.5%.
- Market sentiment is extremely bullish as inflation in the United States has decelerated beyond expectations. The monthly headline and core Consumer Price Index (CPI) reported a moderate pace of 0.2%.
- Minneapolis Federal Reserve (Fed) Bank President Neel Kashkari cited that policy rates are needed to raise further and supervisors must ensure that banks are prepared to run new high-inflation stress tests to identify at-risk banks and size individual capital shortfalls.",
- Per the CME Fedwatch tool, investors are hoping that July’s interest rate hike would be the last nail in the coffin this year.
- The US Dollar Index (DXY) has extended its fall out to 100.12 as US Producer Price Index (PPI) has softened further. On a monthly basis, headline and core PPI have registered a nominal pace of 0.1% vs. expectations of 0.2%. Annual PPI has softened sharply to 0.1% while core PPI has decelerated to 2.4% in the same period.
Technical Analysis: Pound Sterling maintains auction above 1.3050
Pound Sterling looks strong enough to sustain above the psychological resistance of 1.3000. The strength in the Cable is coming from a vertical sell-off in the US Dollar Index after the soft inflation report. The Cable has continued its five-day winning spell and is approaching the upper portion of the Rising Channel chart pattern for a confident breakout. Short-to-long-term daily Exponential Moving Averages (DEMAs) are upward-sloping, indicating firmness in the upside bias.
Investors should wait for a corrective move to build fresh long positions as the current market positioning brings an unfavorable risk-reward status.
BoE FAQs
What does the Bank of England do and how does it impact the Pound?
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
How does the Bank of England’s monetary policy influence Sterling?
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
What is Quantitative Easing (QE) and how does it affect the Pound?
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
What is Quantitative tightening (QT) and how does it affect the Pound Sterling?
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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.
