Pound Sterling declines on disappointing UK business growth
- The Pound Sterling trades lower against the US Dollar as Fed Chair Powell signals caution on further policy easing.
- Fed’s Bowman argued in favor of reducing interest rates quickly to prevent further weakness in the job market.
- The UK’s overall business activity growth cooled down in September.
The Pound Sterling (GBP) trades lower against its peers on Wednesday as United Kingdom (UK) business activity growth has slowed down in September. Flash S&P Global Composite Purchasing Managers Index (PMI) came in lower-than-expected at 51.0, against estimates of 52.7 and from 53.5 in August, indicating that overall business activity expanded, but at a moderate pace.
The overall growth in business activity dropped due to continued weakness in the manufacturing sector. The S&P Global Manufacturing PMI contracted to 46.2, while it was expected to remain steady at 47.0. A figure below 50.0 is considered a contraction in business activity. The S&P Global Services PMI dropped to 51.9 from estimates of 53.5 and the prior reading of 54.2.
The PMI report also signaled continued job losses and declining new business from global markets in the wake of the trade war, following the imposition of tariffs by the US on its trading partners.
Signs of cooling UK job market conditions and declining overseas business activity could force the Bank of England (BoE) to become dovish on interest rates. Last week, the BoE held interest rates steady at 4% and retained its “gradual and careful” monetary easing guidance.
The BoE maintained the status quo as the UK inflation has remained well above the central bank’s target of 2%. However, the BoE stated that price pressures are expected to peak at around 4% in September. On Tuesday, BoE Chief Economist Huw Pill expressed confidence that inflation will ease in the near term.
Pound Sterling Price Today
The table below shows the percentage change of British Pound (GBP) against listed major currencies today. British Pound was the weakest against the Australian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.40% | 0.32% | 0.47% | 0.23% | -0.28% | 0.24% | 0.34% | |
| EUR | -0.40% | -0.08% | 0.10% | -0.17% | -0.68% | -0.16% | -0.06% | |
| GBP | -0.32% | 0.08% | 0.12% | -0.09% | -0.53% | -0.08% | -0.02% | |
| JPY | -0.47% | -0.10% | -0.12% | -0.26% | -0.74% | -0.32% | -0.16% | |
| CAD | -0.23% | 0.17% | 0.09% | 0.26% | -0.47% | 0.00% | 0.12% | |
| AUD | 0.28% | 0.68% | 0.53% | 0.74% | 0.47% | 0.52% | 0.63% | |
| NZD | -0.24% | 0.16% | 0.08% | 0.32% | -0.00% | -0.52% | 0.13% | |
| CHF | -0.34% | 0.06% | 0.02% | 0.16% | -0.12% | -0.63% | -0.13% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).
Daily digest market movers: Pound Sterling declines against US Dollar
- The Pound Sterling slumps to near 1.3460 against the US Dollar (USD) during the European trading session on Wednesday. The GBP/USD pair faces selling pressure as the Pound weakens following disappointing UK business activity data in September and the US Dollar rebounds after Federal Reserve (Fed) Chair Jerome Powell's speech on Tuesday, in which he reiterated caution on loosening the monetary policy further.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, recovers to near 97.60 after a two-day corrective move.
- Powell signaled caution on interest rate cuts as the monetary policy needs a balancing act amid high inflation and a faltering job market, which he called a “challenging situation” for the central bank.
- "Near-term risks to inflation are tilted to the upside and risks to employment to the downside - a challenging situation,’’ Powell said, and added that the current interest rate range leaves the central bank “well positioned to respond to potential economic developments”.
- Contrary to Chair Powell’s comments, Governor Michelle Bowman signaled urgency on interest rate cuts amid a slowdown in the United States (US) job market. "If demand conditions do not improve, businesses may need to begin to lay off workers," Bowman warned.
- Going forward, the GBP/USD pair will be influenced by the US Durable Goods Orders and the US Personal Consumption Expenditure Price Index (PCE) data for August, which will be released on Thursday and Friday, respectively.
Technical Analysis: Pound Sterling slides below 1.3500
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The Pound Sterling drops to near 1.3485 against the US Dollar on Wednesday. The near-term trend of the GBP/USD pair remains bearish as the 20-day Exponential Moving Average (EMA) continues to act as a key barrier around 1.3523. The Cable trades near the lower end of a Rising Channel formation around 1.3470
The 14-day Relative Strength Index (RSI) has fallen sharply below 50.00. A fresh bearish momentum would emerge if the RSI breaks below 40.00.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the July 1 high near 1.3800 will act as a key barrier.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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.
