Pound Sterling sees more upside on Mann's hawkish guidance

Pound Sterling capitalizes on improved market sentiment and BoE’s Mann hawkish commentary.
Katherine Mann favored an aggressive policy-tightening approach.
Investors shift focus to the UK August GDP data scheduled for Thursday.

The Pound Sterling (GBP) stabilizes after recovering from a six-month low as market sentiment improves and Bank of England (BoE) policymaker Katherine Mann calls for a more aggressive approach to bring down inflation to 2%. Last week, BoE Governor Andrew Bailey said he expected inflation to decline to or below 5% by year-end, but added that he doesn’t promise the achievement of price stability in a timely manner.

The UK manufacturing and construction sectors are bearing the brunt of higher interest rates. UK’s factory activity has been contracting, with the PMI gauge coming in below the 50.0 threshold for a long period. To get more insights about the current status of the economy, investors will shift focus to the UK factory activity and GDP data for August, which will be released on Thursday.

Daily Digest Market Movers: Pound Sterling eyes more upside as US Dollar corrects

Pound Sterling faces some selling pressure near 1.2250 against the US Dollar, but more upside seems favored as Bank of England policymakers supported more aggressive monetary policy.
BoE’s Katherine Mann, who has been a hawkish policymaker, said on Monday that central bankers need to be more aggressive. The central bank is not solely responsible for bringing down inflation to 2% but also needs to tame rising inflation expectations, she said.
Katherine Mann expressed concerns about how long inflation will remain above the desired target of 2%.
UK inflation is higher compared with other G7 economies. Rising Oil prices due to deepening Middle East tensions could prompt higher inflation expectations.
Due to higher inflation and interest rates by the BoE, the UK economy is going through a vulnerable phase. UK manufacturing output and construction spending have both declined as firms are worried about the demand outlook.
Investors will focus on the August GDP report, which will be published on Thursday, which will provide further clues about the country’s economic performance. Economists expect monthly Manufacturing Production contract by 0.4% against a 0.8% contraction recorded for July. Monthly Industrial Production is foreseen to decline at a slower pace of 0.2% against a contraction of 0.7% in July.
The continued decline in UK factory activity would indicate that firms are still pessimist about forward demand despite a pause in the policy-tightening spell by the BoE.
The monthly Gross Domestic Product (GDP) is seen expanding by 0.2%, swinging from a 0.5% decline recorded in July.
On the global front, investors seem to be digesting the Israel-Hamas war as the latter said it is open to discussions over a truce. Still, talks about a ceasefire aren’t expected soon and the is an increasing risk of participation from other countries in the conflict. .
The US Dollar Index (DXY) found some support after testing the crucial level of 106.00. Investors shift focus to the United States inflation data, which will be published on Thursday. The core Consumer Price Index (CPI), which excludes volatile food and Oil prices, is seen expanding at a steady pace of 0.3% on month.
The USD Index could strengthen if the inflation report for September turns out hotter than expected. Sticky inflation and robust labor market conditions could force Federal Reserve (Fed) policymakers to opt for another interest rate hike on November 1.
Before that, the FOMC minutes from the last Fed meeting will be keenly watched, which will be released on Wednesday. The FOMC minutes for September monetary policy will likely provide the rationale behind keeping interest rates unchanged.

Technical Analysis: Pound Sterling stabilizes above 1.2200

Pound Sterling faces barricades near its weekly high at 1.2250, but the pair is expected to extend its upside momentum as the risk appetite of market participants is improving. The GBP/USD pair has rebounded to near the 20-day Exponential Moving Average (EMA) at around 1.2264. However, the broader GBP/USD outlook is bearish as the 50-day and 200-day Exponential Moving Averages (EMAs) have delivered a death cross near 1.2450. Potential support is 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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