Pound Sterling falls sharply on dismal mood, UK Q3 GDP eyed
- Pound Sterling continues to fall amid caution over the UK’s performance in the third quarter.
- Economists see a contraction in the Q3 UK GDP by 0.1%.
- UK firms were hesitant to recruit permanent placements in October due to economic uncertainty.
The Pound Sterling (GBP) is declining gradually as investors have turned cautious ahead of the United Kingdom's Q3 Gross Domestic Product (GDP) data and Federal Reserve (Fed) Chair Jerome Powell’s remarks on the interest rate outlook. Economists have forecasted a nominal contraction in the UK’s growth rate as firms underutilized their entire capacity due to weak spending from households.
Business investment remained lower as higher borrowing costs forced firms to postpone capacity expansion plans. The UK labor demand and investments are expected to deteriorate for a longer period as the Bank of England (BoE) sees performance from the economy flat-lining. The risks of a recession have escalated as Middle East tensions could ramp up energy prices by disrupting supply chains.
Meanwhile, UK Chancellor Jeremy Hunt commented that he is going to recommit the need for tightening overall spending later this month in an attempt to ease price inflation.
Daily Digest Market Movers: Pound Sterling remains on backfoot amid risk-off mood
- Pound Sterling consolidates below the crucial resistance of 1.2300 as investors await the UK Q3 GDP data, which will showcase economic damage due to a historically tight rate-hiking campaign by the Bank of England.
- Economists expect the UK economy to have contracted by 0.1% in the third quarter against 0.2% growth in the April-June quarter.
- The downbeat expectations for the UK’s performance in Q3 are the outcome of the deepening cost of living crisis, which has led to a sharp decline in retail demand.
- Households’ spending contracted in two out of three months of the previous quarter as higher consumer inflation and a recovery in energy prices squeezed the real incomes of individuals.
- Recent data from Barclays and the British Retail Consortium (BRC) showed that consumer spending slowed to 2.6% and 2.5% in October respectively. This compared to 4.2% in September, for the Barclays data, and was below both the 3-month and 12-month averages of 3.1% and 4.2% respectively for the BRC data.
- The decline in spending reflects how households are struggling to survive amid high headline inflation, which stood at 6.7% in September.
- Many consumers are curtailing non-essential purchases to save for Christmas and anticipated winter fuel bills, said Esme Harwood, a director at Barclays.
- Business activities fell sharply in Q3 due to weak retail demand that forced firms to slow down labor demand and make cuts on purchasing and inventory.
- S&P Global reported that the Services PMI remained below the 50.0 threshold that distinguishes growth from contraction for the third month in a row. The Manufacturing PMI has been contracting for almost a year.
- Construction spending has also come down significantly as home-buyers have postponed their plans to purchase to avoid higher installment obligations due to escalated borrowing costs.
- Commentary from BoE Chief Economist Huw Pill delivered on Monday indicated that risks of an excessive slowdown in the economy have escalated as the central bank is committed to bringing down inflation to 2% over a two-year timeframe.
- Huw Pill warned that the consequences of a restrictive policy stance would be borne by households with lower income.
- The BoE, in its latest forecasts, conveyed that the economy will be stagnant in the next two years, which could impact labor demand ahead.
- The latest UK job survey by KPMG and REC indicated that employers were reluctant to provide permanent placements and relied upon temporary workforce amid uncertainty over the economic outlook.
- Meanwhile, the war between Israel and Hamas escalated as Israeli Defense Forces (IDF) targeted Hamas tunnels in Gaza.
- The US Dollar Index (DXY) turns sideways near 105.70 after a sharp recovery as investors await Federal Reserve (Fed) Chair Jerome Powell’s speech, which will provide guidance over monetary policy action in December.
Technical Analysis: Pound Sterling declines towards 1.2200
Pound Sterling trades inside Tuesday’s range ahead of Jerome Powell’s speech. The GBP/USD pair continues its gradual decline for the third session in a row after facing stiff barricades near the 200-day Exponential Moving Average (EMA), which is around 1.2400.
On the daily timeframe, the 20-EMA has started sloping north, which indicates that the asset is aiming for a reversal move. A comfortable move above the 200-EMA would cement a bullish reversal.
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.
