- Pound Sterling faces an intense sell-off as the UK economy is exposed to a possible recession.
- The BoE seems done with hiking interest rates as UK Services PMI contracts.
- The market mood remains downbeat as central bankers are expected to keep interest rates higher for a longer period.
The Pound Sterling (GBP) remains on a bearish trajectory as investors worry about the UK’s economic outlook. The GBP/USD pair weakens further as a persistent Consumer Price Index (CPI) and a restrictive interest rate policy by the Bank of England (BoE) continue to accelerate the burden on households. The outlook for the GBP/USD pair worsened further as the UK’s Services PMI remained below the 50.0 threshold for the second straight month in September in an S&P Global preliminary PMI report.
Like the Federal Reserve (Fed), the BoE vowed to keep interest rates sufficiently high for a longer period. Unlike the US Dollar, the Pound Sterling is facing an intense sell-off as risks of a recession in the UK economy are skewed to the upside. Market participants expect UK PM Rishi Sunak to fail to keep his promise of halving inflation to 5.3% by year-end as the BoE seems done with hiking interest rates.
Daily Digest Market Movers: Pound Sterling eyes more downside amid firmer US Dollar
- Pound Sterling continues a four-day losing spell as investors rush for safe-haven assets as uncertainty over global economic prospects deepens due to persistent inflation.
- Upside risks to a slowdown in the UK economy have forced investors to dump the Pound Sterling.
- In addition to potential slowdown risks, the likelihood of a rebound in inflation has improved as the Bank of England has paused the policy-tightening spell after raising them 14 consecutive times.
- Rising energy prices due to the global oil rally could accelerate headline inflationary pressure, but their impact seems limited.
- Last week, BoE policymakers unexpectedly skipped the interest rate hike, while investors anticipated a 25 basis point (bp) rate increase. Apart from falling inflation, squeezing labor demand, and contracting Manufacturing and Services PMIs seem major factors behind a pause in the rate-tightening spell.
- A sudden pause in the BoE’s rate-hiking regime indicates that the central bank is done with hiking rates and will keep them higher long enough until the achievement of price stability.
- Unlike the resilient US Dollar, the Pound Sterling is expected to remain under pressure for a longer period. The Fed is also keeping interest rates unchanged, but their decision is backed by falling inflation and a stronger economy while the UK economy is going through a vulnerable phase.
- UK manufacturing activities have been contracting over a longer period. The Service sector has started following the footprints of factory activities and remained below the 50.0 threshold for the second time in a row.
- The release of UK Manufacturing and Services PMI below the 50.0 threshold indicates that overall economic activities are contracting, signaling a vulnerable economic outlook.
- Big Four accounting firm KPMG projected that the UK economy is set to slow in the second half of 2023 due to high-interest rates and policy uncertainty before the general elections.
- Later this week, investors will keenly watch the final April-June quarter Gross Domestic Product (GDP) numbers. The final annual GDP data is seen maintaining a steady growth rate of 0.4%.
- The market mood remains cautious as investors are worried about the global economic outlook as central bankers are expected to keep interest rates sufficiently high for a longer period.
- The US Dollar Index (DXY) prints a fresh 10-month high around 106.20 as investors see the US economy remaining resilient despite the Fed vowing to keep interest rates sufficiently restrictive until inflation comes down to 2%.
- On Monday, a hawkish commentary from Minneapolis Federal Reserve Bank President Neel Kashkari infused strength in the US Dollar and Treasury yields. Fed Governor Kashkari supports further policy-tightening by the central bank due to a resilient US economy.
Technical Analysis: Pound Sterling refreshes six-month low at 1.2170
Pound Sterling extended a four-day losing spell on Tuesday as the risk appetite of market participants weakened amid deepening UK slowdown fears. The GBP/USD pair drops below the round-level support of 1.2200, printing a fresh six-month low near 1.2170. The pair is expected to deliver more weakness. A bear cross, represented by the 20 and 200-day Exponential Moving Averages (EMAs), warrants more weakness ahead. Momentum oscillators have reached oversold levels.
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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