Pound Sterling extends upside as risk appetite solidifies
- Pound Sterling has jumped to near 1.2740 as consumer inflation expecations have soared.
- Inflation in the United Kingdom is sticky due to the tight labor market and 45-year high food inflation.
- After a slightly higher Manufacturing PMI, investors are shifting their focus toward Services PMI.
The Pound Sterling (GBP) has climbed to near 1.2740 ahead of key Service PMI numbers after better-than-expected Manufacturing PMI data. The GBP/USD pair is non-directional as the market mood is broadly quiet due to the Independence Day holiday in the United States. Investors would keep their entire focus on interest rate guidance from Bank of England (BoE) policymakers.
The economic outlook for the United Kingdom is still solid as demand from households is upbeat despite higher interest rates by the Bank of England. While problems or BoE policymakers and the UK government are galloping as inflation looks extremely sticky above 8.5% and tight monetary policy is failing to do the expected job.
Daily Digest Market Movers: Pound Sterling scales higher amid risk-on mood
- Pound Sterling finds strength as United Kingdom’s economic prospects are improving despite higher interest rates from the Bank of England.
- UK’s S&P Manufacturing PMI for June landed at 46.5, higher than the consensus and the former release of 46.2.
- Manufacturing PMI has been broadly contracting straight for the past 11 months. A figure below 50.0 is considered a generation contraction.
- Later this week, investors will focus on the June Services PMI data. The economic data is seen steady at 53.7.
- The Bank of England warned commercial banks on Monday that they may be underestimating their exposure to private equity and to commodity markets at a time when rising interest rates could squeeze liquidity in the market, as reported by Reuters.
- The monthly survey by Citi Bank and polling firm YouGov showed that consumer inflation expectations for one year have increased to 5.0% in June from 4.7% in May.
- This must be the outcome of stubborn inflation, which is reluctant to ditch the territory above 8.5%. Thanks to elevated food price inflation and tight labor market conditions that are keeping inflation higher.
- BoE Governor Andrew Bailey is consistently supporting further interest rate hikes as the UK economy is dealing with more persistent inflation.
- Contrary, BoE policymaker Silvana Tenreyro is opposing further increases in interest rates as risks having to make a sharp U-turn if it tightens policy anymore.
- Market mood is turning cheerful as investors have shrugged-off fears associated with upcoming second-quarter result season.
- The US Dollar Index (DXY) is broadly under pressure as the United States Manufacturing PMI continued contraction straight for eight months.
- US factory activities landed at 46.0, significantly lower than the expectations of 47.2 and the former release of 46.9. Contrary to the US PMI data, New Orders Index jumped to 45.6, higher than the consensus of 44.0 and the prior release of 42.6.
- Later this week, investors will focus on the Federal Open Market Committee (FOMC) minutes and the employment data to be released by the US Automatic Data Processing (ADP).
- US ADP private employment report is expected to disclose the addition of fresh 180K employees, lower than the former addition of 278K.
Technical Analysis: Pound Sterling recovers firmly
Pound Sterling is correcting toward the lower portion of the Rising Channel chart pattern in which pullback moves are considered buying opportunities by the market participants. The Cable is holding the 20-period daily Exponential Moving Average (EMA), which indicates that the upside momentum is extremely solid.
Buyers could add positions if Cable corrects further to 1.2570 as a bargain buy opportunity would emerge. While upside bias could fade if it extends correction below the psychological support of 1.2500.
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.
