Pound Sterling accelerates ahead of UK factory and GDP data

  • Pound Sterling holds onto gains ahead of US factory and GDP data.
  • UK factory data is expected to contract due to a vulnerable demand outlook.
  • BoE’s Katherine Mann supports further policy tightening to bring down inflation to 2%.

The Pound Sterling (GBP) continues its rally into a sixth day on Wednesday as investors shift their focus to United Kingdom factory data for August, which will be published on Thursday. The GBP/USD pair capitalizes on hawkish guidance from Bank of England (BoE) policymaker Katherine Mann and upbeat market sentiment. The Pound Sterling has performed better against the US Dollar as market participants are not expecting a further widening of the policy divergence between the BoE and the Federal Reserve (Fed).

UK economic activities have been facing the wrath of higher interest rates. Factory activities for August are expected to continue their contracting spell as the weak demand environment has dented the domestic and overseas markets. In addition to that, UK firms have cut their inventory backlog heavily, as well as labor to achieve efficiency in operations. They appear reluctant to add capacity due to higher borrowing costs.

Daily Digest Market Movers: Pound Sterling extends upside amid risk-on mood

  • Pound Sterling extends winning spell as market mood remains upbeat despite Middle East conflicts.
  • The GBP/USD pair has recorded a bullish closing for five trading sessions in a row as investors expect that policy divergence between the Fed and the BoE will not widen further.
  • In September, the BoE surprisingly announced a pause in rate hiking to avoid further calamity in the UK’s economic activities.
  • The UK’s factory activity, Services PMI, and construction activities have remained below the 50.0 threshold in September, facing the consequences of the BoE’s battle with inflation.
  • The recovery move in the Pound Sterling is not backed by supportive fundamentals. Therefore, it could face selling pressure as BoE policymaker Katherine Mann favors an aggressive approach to bring down inflation to 2% in a timely manner. 
  • BoE’s Financial Policy Committee (FPC) warned on Tuesday that households may continue to face financial hardships due to increasing borrowing costs. 
  • BoE’s Mann warned that in addition to lowering inflation to 2%, the central bank needs to wipe out rising consumer inflation expectations too.
  • The UK inflation could rebound as rising oil prices due to the Israel-Palestine conflict would accelerate consumer inflation globally. The IMF warned that a 10% increase in Oil prices would weigh down global output by about 0.2% in the following year, boosting global inflation by about 0.4%.
  • Going forward, investors will focus on the UK factory activity data for August, which will be published on Thursday at 06:00 GMT. 
  • Investors see monthly Manufacturing Production contracting by 0.3% against a 0.8% contraction recorded for July. Monthly Industrial Production is foreseen to decline at a slower pace of 0.2% against the contraction by 0.7% in July. 
  • The annual Manufacturing and Industrial production data are expected to accelerate to 3.4% and 1.7%, respectively. The monthly Gross Domestic Product (GDP) is seen expanding by 0.2% against a decline of 0.5% recorded for July.
  • The GBP/USD pair has managed to perform better due to a correction in the US Dollar. The US Dollar Index (DXY) has stabilized below 106.00 as Fed policymakers continue to support an unchanged interest rate policy in November due to rising Treasury yields.
  • The volatility in the USD Index is expected to spurt though US producer inflation data remained hotter than expected in September. The headline inflation rose 2.2% on a yearly basis in September, up from the 2% increase recorded in August. This reading came in higher than the market expectation of 1.6%.  
  • The annual Core PPI increased 2.7% in the same period, higher than the August reading and analysts' estimates of 2.2% and 2.3%, respectively. On a monthly basis, the Core PPI rose 0.3%.
  • Meanwhile, investors await the FOMC minutes will provide a detailed explanation behind September’s unchanged interest rate decision. Apart from that, the outlook on inflation and interest rates will be keenly watched.
  • This week, investors will pay attention to September CPI data, which will shape the monetary policy decision for November’s meeting.

Technical Analysis: Pound Sterling jumps above 1.2300

Pound Sterling recorded a five-day winning streak through Tuesday, and that record of gains appears to be continuing on Wednesday as well. GBP/USD is expected to continue the same as the risk appetite of market participants has improved. The GBP/USD pair climbs above the 20-day Exponential Moving Average (EMA), which trades around 1.2273. The broader GBP/USD outlook is bearish as the 50 and 200-day Exponential Moving Averages (EMAs) have delivered a Death Cross near 1.2450. Potential support is placed around 1.2000.

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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