Pound Sterling clings to gains as risk-appetite strengthens, PMI's in focus

Pound Sterling prints a fresh weekly high on upbeat market mood.
Investors see a technical recession in the UK economy as the cost-of-living crisis deepens.
The appeal of risk-sensitive assets fades amid easing Fed rate-cut bets.

Sagar Dua FXStreet

The Pound Sterling (GBP) refreshes weekly high as risk-appetite improves. The broader appeal for the GBP/USD pair is also upbeat despite the United Kingdom economy threatening to tip into a technical recession. This has come about due to vulnerable household spending and steep pessimism among business owners over the economic outlook.

The Bank of England (BoE) is expected to struggle to reach a decision because of stubbornly higher price pressures and recession fears. This will make it difficult for policymakers to stick to a restrictive interest rate stance. The market mood remains cheerful despite investors shifting their bets to the May monetary policy meeting for the first rate-cut by the Federal Reserve (Fed), which was previously anticipated in March. Fed policymakers have been supporting the narrative of higher interest rates for a longer period to ensure inflation returning to the 2% target in a timely manner.

Daily Digest Market Movers: Pound Sterling remains upbeat as risk-on mood strengthens

Pound Sterling rises sustainably above the crucial resistance of 1.2700 despite unfavourable conditions for Bank of England policymakers in maintaining a restrictive monetary policy stance after a big drop in the Retail Sales data for December.
The UK Office for National Statistics (ONS) reported that annual Retail Sales surprisingly fell 2.4% while investors projected a growth of 1.1%. The ONS said households were doing Christmas shopping earlier than usual. Sales at food stores were significantly down.
A sharp decline in consumer spending indicates a deepening cost-of-living crisis due to higher interest rates and stubborn price pressures.
This has tipped fears of a recession in the UK economy as weak spending by households would discourage firms to maintain current production levels.
It is worth mentioning that the UK economy, as per the latest estimates from the ONS, reported a decline in growth in the Q3 Gross Domestic Product (GDP) of 2023 by 0.1%. If the economy contracts in Q4 too, it will be considered a technical recession.
On the inflation side, the UK economy is operating with core inflation at 5.1% and the service price index at 6.4%, which are BoE’s preferred inflation tools while considering monetary policy decisions.
Price pressures in the UK economy are stubborn if compared with inflation in other Group of Seven economies, making it complicated for policymakers to choose between a restrictive policy stance for higher inflation or unwinding of tight interest rates to safeguard the economy from shifting into a recession.
This week, market participants will focus on the preliminary S&P Global PMI for January, which will be published on Wednesday. As per the expectations, the economic data is expected to remain upbeat.
Meanwhile, the market mood is upbeat despite chances of the Federal Reserve (Fed) keeping interest rates unchanged in March rising significantly.
As per the CME FedWatch tool, traders see a more than 54% chance of the Fed keeping interest rates unchanged in March.
The US Dollar Index (DXY) has dropped to near 103.20 amid a cheerful market mood. 10-year US Treasury yields have dropped to near 4.12%.

Technical Analysis: Pound Sterling stabilizes above 1.2700

Pound Sterling climbs above round-number-level resistance at 1.2700 amid risk-on market sentiment. The near-term demand for the GBP/USD pair has turned bullish as it has jumped above the 20-day Exponential Moving Average (EMA), which trades near 1.2700. The 50-day EMA is near 1.2617. Fresh upside would appear if the Cable manages to climb above the round-level resistance of 1.2800.

The 14-period Relative Strength Index (RSI) trades in the 40.00-60.00 range, which indicates a sideways performance.

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.

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.

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