Pound Sterling dives on downbeat UK factory data, dismal sentiment
- Pound Sterling faces some pressure as the S&P Global UK Manufacturing PMI data remains below consensus.
- UK factory activities remained due to subdued demand from domestic economy and exports markets
- The BoE may start reducing interest rates earlier due to deepening recession fears.
The Pound Sterling (GBP) faces a sharp sell-off after the release of the weaker-than-projected S&P Global Manufacturing PMI for December. The factory data remained lower at 46.2 than expectations and the former reading of 46.4. The economic data below the 50.0 threshold indicates contraction in economic activities. The Manufacturing PMI remains below the 50.0 threshold for the 17-month in a row.
S&P Global commented that “UK manufacturing output contracted at an increased rate at the end of 2023. The demand backdrop also remains frosty, with new orders sinking further as conditions remain tough in both the domestic market and in key export markets, notably the EU. The downturn has hit manufacturers' confidence, which dipped to its lowest level in a year, and encouraged renewed cost caution with further cutbacks to stock levels, purchasing and employment.
Major action in the Pound Sterling would come from investor speculation regarding the timing of possible rate cuts by the Bank of England (BoE). Market participants currently expect the BoE to start cutting interest rates from May given the United Kingdom economy is exposed to a technical recession. BoE policymakers have been refraining themselves from endorsing interest rate-cut up until now but a likely recession could force them to start discussions about reducing interest rates.
Daily Digest Market Movers: Pound Sterling falls sharply on downbeat market mood
- Pound Sterling drops vertically as the United Kingdom’s S&P Global Manufacturing PMI for December failed to match expectations as higher interest rates by the Bank of England and underlying price pressures have narrowed pockets of households.
- The economic data drops to 46.2 as higher interest rates and deepening cost of living crisis hurt demand from the domestic and the overseas market.
- The outlook for the UK manufacturing sector is expected to remain gloomy but suppliers may be forced to offer raw-materials at lower prices, which will ease price pressures.
- Broadly, the Pound Sterling has performed well against the US Dollar as the appeal of risk-perceived assets remain upbeat.
- However, the strength in the Pound Sterling could be hampered as the UK is at risk of a technical recession.
- As per the latest estimates from the UK Office for National Statistics (ONS), the UK economy shrank by 0.1% in the third quarter of 2023.
- The BoE is not expecting any growth in the final quarter of 2023. If the UK economy contracts in the October-December period, it will signal a technical recession (two consecutive quarters of negative growth).
- Contrary to UK ONS GDP data, Finance Minister Jeremy Hunt said that the outlook of the economy is not as bad as the data suggested.
- The case of a recession in the UK economy would compel BoE policymakers to consider rate cuts earlier than previously projected.
- Market participants hope that the BoE may start reducing interest rates from May from a previously projected August.
- Later this week, investors will focus on the S&P Global Services PMI data for December, which will be published on Thursday. The economic data is seen steady at 52.7.
- On the US Dollar front, the US Dollar Index (DXY) recovers further to near 101.50 as investors shift focus towards the ISM Manufacturing and Services PMI and labour market data, which will be published this week.
- The broader appeal of the US Dollar is bearish as market participants hope that the Federal Reserve (Fed) will be the first among the Group of Seven economies, to start a rate-cut campaign.
- Investors see the Fed reducing interest rates by 25 basis points (bps) to 5.00-5.25% from March and one more rate cut is anticipated in May.
Technical Analysis: Pound Sterling drops to near 1.2630
Pound Sterling falls vertically after a consolidation breakdown to near 1.2640 as the risk-appetite of investors fades significantly. Investors await the US labour market and PMIs for furtehr action.
On a daily time frame, the GBP/USD pair continues to stay above the 20-day Exponential Moving Average (EMA), which indicates that near-term demand is bullish. Momentum oscillators struggle to sustain in the bearish trajectory.
Central banks FAQs
What does a central bank do?
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
What does a central bank do when inflation undershoots or overshoots its projected target?
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
Who decides on monetary policy and interest rates?
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Is there a president or head of a central bank?
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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.
