Pound Sterling declines as tight monetary policy deepens recession fears

The Pound Sterling (GBP) struggles to extend recovery and drops sharply amid bleak economic prospects propelled by higher inflation and aggressive monetary policy by the Bank of England (BoE). The GBP/USD pair picks demand as the market mood has turned bullish amid hopes that interest rates by global central banks will peak sooner than expected.

United Kingdom’s preliminary factory activity faltered in July as firms postponed the demand for credit to avoid higher interest obligations. Apart from costly borrowing rates, demand for big-ticket items has slowed as many households are struggling to buy essentials. Meanwhile, housing demand is also facing increasing pressure as individuals are restricting themselves from borrowing money to avoid higher mortgage rates.

Daily Digest Market Movers: Pound Sterling bears strengthen as economic recovery falters

• Pound Sterling drops as the economic outlook has dampened due to higher interest rates by the Bank of England.
• S&P Global reported on Monday that United Kingdom’s factory activity contracted to 45.0 in early July, missing the  46.1 expected and below the 46.5 seen in June, recording a 12th straight contraction in the manufacturing sector. A PMI figure below 50.0 suggests contraction.
• UK’s preliminary Services PMI dropped to 51.5 from the consensus and the prior release of 53.0 and 53.7, respectively.
• July preliminary PMIs were the weakest since January, adding to evidence of the pinch of high inflation and higher interest rates by the Bank of England.
• A sluggish economic outlook has reinforced expectations of a recession in the British economy.
• Uncertainty about UK inflation still persists as resilient consumer spending could offset the recent slowdown in inflation.
• Aggressive BoE’s policy-tightening is building pressure on first-time home buyers. UK homebuilders have cut down on purchasing land and construction activities, Reuters reported.
• To offer support to the middle class that pays high rents, UK Prime Minister Rishi Sunak promised to build one million homes by the next election.
• However, the pressure of higher mortgage rates is likely to stay for longer as the UK central bank is preparing for fresh rate hikes to tame sticky inflation.
• June’s softening price pressures might offer some time to BoE policymakers to reshape the roadmap of bringing inflation down, but a small interest-rate increase in August cannot be ruled out.
• The US Dollar Index (DXY) comes under pressure as investors are certain about an interest rate hike of 25 basis points (bps) by the Federal Reserve (Fed) on July 26 to the 5.25%-5.50% range.
• Investors focus on the interest-rate guidance from Fed Chair Jerome Powell as Fed officials have reiterated the need for one more interest-rate hike in addition to July’s increase.
• Contrary to Fed officials, investors expect that Fed’s 17-month policy tightening cycle will peak on July 26.
• United States preliminary July Manufacturing PMI outperformed expectations but remained below the 50.0 figure that separates contraction. Meanwhile, the Services PMI fell from June’s reading and came in below consensus.
• After the Fed policy meeting, investors will shift their focus toward the second quarter Gross Domestic Product (GDP) data and June’s Durable Goods Orders.

Technical Analysis: Pound Sterling declines to test1.2800

Pound Sterling extends its recovery to near 1.2850 as market sentiment has turned bullish on hopes that the Federal Reserve’s (Fed) interest-rate hike in July will be the last nail in the coffin. The Cable is building a base after declining more than a week below the 20-day Exponential Moving Average (EMA). More broadly, the asset maintains higher highs and higher lows, indicating strength in the upside bias.