Pound Sterling drops to near six-month low on UK's sluggish economic outlook

Pound Sterling may continue its three-day losing spell further amid uncertainty over the economic outlook.
S&P Global reported that UK Services PMI contracted for the second time straight.
BoE policymakers shifted focus on the UK’s economic prospects against persistent inflationary pressure.

The Pound Sterling (GBP) faces selling pressure as investors start worrying about the United Kingdom’s weak economic outlook and upside risks to inflation on Albion’s shores. The GBP/USD pair came under severe pressure after an unexpected pause in the policy-tightening spell by the Bank of England (BoE) last week. The GBP/USD outlook weakens as a sudden skip in the rate-tightening regime by the UK central bank against expectations of an interest rate increase signaled risks of economic slowdown.

The UK economy is seen losing strength amid uncertainty over the interest rate outlook ahead of general elections. UK PM Rishi Sunak promised to halve inflation to 5.3% by year-end, but a pause announced by BoE policymakers indicates that the authority may fail to keep the word. UK economic activities have been hit hard by higher interest rates. After contracting manufacturing activities, Services PMI also slipped below the 50.0 threshold for the second time in a row.

Daily Digest Market Movers: Pound Sterling weakens amid cautious market mood

Pound Sterling trades marginally above a six-month low near 1.2200 as investors see the UK economy sharply slowing in the last quarter of 2023.
Investors turned cautious about the GBP/USD outlook as the UK's consumer inflation expectations are expected to rise and prospects of economic activities seem worse due to a deteriorating demand environment.
Inflationary pressure in the UK economy is expected to accelerate further as the Bank of England (BoE) has paused the policy-tightening spell at 5.25%, while investors projected the interest rate peak at 5.75%.
BoE policymakers shifted focus on UK economic prospects due to slowing labor demand and contracting factory activities. For higher inflation, the BoE confirmed keeping interest rates elevated until the accomplishment of price stability.
S&P Global reported a mixed preliminary PMI report for September. The Manufacturing PMI improved to 44.2 vs. expectations and the former release of 43.0. Services PMI landed at 47.2 below the consensus of 49.2 and August's reading of 49.5.
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 consecutively for the second time.
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.
BoE policymakers also see the growth rate lower ahead. The BoE conveyed in its monetary policy statement that Q3 Gross Domestic Product (GDP) now is expected to rise 0.1% (Aug: +0.4%), with underlying growth in H2 2023 likely weaker than forecast in August.
The reasoning behind a slowdown in the GDP numbers is the rising uncertainty over the interest rate peak before the general elections.
In August, Retail Sales recovered strongly after washing out in July. On a monthly basis, consumer spending rose by 0.4% vs. expectations of 0.5%. In July, Retail Sales contracted by 1.1%, while the economic indicator excluding fuel prices matched expectations at 0.6%.
The market mood remains cautious as investors see upside risks for a global slowdown. Global central bankers have paused their policy-tightening spell after raising interest rates significantly in the past two years as high inflation bites growth.
The US Dollar Index (DXY) has traded inside the 105.27-105.78 range for the past three trading sessions as investors remain uncertain about the interest rate outlook in the remainder of 2023.
Investors are infusing funds into the US Dollar amid a resilient US economy as it has absorbed the consequences of higher interest rates efficiently while other G7 economies are on the brink of recession.
For further action, investors await the Durable Goods Orders data for August, which will be published on Wednesday.

Technical Analysis: Pound Sterling drops to near 1.2200

Pound Sterling price action has exposed the six-month low near 1.2200 against the US Dollar as the appeal for risk-perceived assets weakens due to global slowdown risks. The Cable struggles to find buying interest as investors remain worried about the UK’s economic growth. The GBP/USD outlook may remain weak as it is expected to continue its three-day losing spell if it fails to defend the immediate support of 1.2230. Downward-sloping 20 and 50-day Exponential Moving Averages (EMAs) warrant more weakness ahead.

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.

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