- Pound Sterling rebounds from 14-week low but recovery seems restricted due to deepening recession fears.
- UK housing and manufacturing sectors have surrendered against BoE’s aggressive tightening policy.
- BoE Broadbent said interest rates need to remain higher for some time as inflation in Britain leads G7 economies.
The Pound Sterling (GBP) recovered after printing a fresh 14-week low, but the broader bias remains bearish as the British economy is exposed to a possible recession due to an aggressive rate-tightening cycle by the Bank of England (BoE). The GBP/USD pair communicates fears about rising interest rates as the tight labor market is losing its appeal, and firms have reported a decline in production due to a dismal demand outlook.
Investors are worried that the UK economy could shift into a recession as the housing sector, economic activities and the labor market are struggling to carry the burden of a restrictive monetary policy. Likely, the risk of a slowdown has eased bets about the interest rate peak at 6.0%, but an interest rate hike at the September monetary policy meeting cannot be ruled out entirely.
Daily Digest Market Movers: Pound Sterling recovery seems less confident
- Pound Sterling delivers a recovery move after a sharp sell-off to near 1.2560 as the risk-off impulse eases. However, the downside bias is still solid.
- The asset printed a fresh 12-week low as investors are worried about the UK’s economic outlook as the Bank of England (BoE) is consistently raising interest rates in the battle against stubborn inflation.
- More interest rate hikes from the BoE are expected as core inflation is still more than three times the desired rate of 2%.
- UK’s hiring momentum has slowed and economic activities have turned vulnerable as the current tightening cycle by the BoE is historically aggressive.
- Traders betting on an interest rate hike to 6.0% have trimmed, and now chances are the UK central bank will pause the tightening spell after pushing interest rates to 5.75%.
- The GfK consumer sentiment indicator improved to -25 in August from a three-month low of -30 in July as UK fuel suppliers passed on the impact of lower energy prices to end consumers.
- BoE Deputy Governor Ben Broadbent said on Saturday that interest rates need to remain higher for some time as inflation in Britain is the highest among G7 economies.
- About interest rates, BoE Broadbent responded “The evidence on spare capacity, and to indicators of domestic inflation, as and when it comes through.”
- Meanwhile, the BoE is preparing to raise interest rates further in September. UK central bank is expected to raise interest rates by 25 basis points (bps) to 5.50%.
- UK markets will remain closed on Monday on account of the Summer Bank Holiday.
- The market mood is upbeat as investors digested that the Federal Reserve (Fed) will follow the ‘’higher for longer’’ interest rate path.
- Fed Chair Jerome Powell commented at the Jackson Hole Symposium that the central bank will remain very careful about interest rates at upcoming monetary policy meetings. Jerome Powell confirmed that the central bank will keep the doors open for further policy tightening.
- As per the CME Fedwatch tool, there is a more than 80% chance of a neutral interest rate decision in September while the majority of investors are betting on an interest-rate hike in November policy.
- The US Dollar Index (DXY) corrects to near 104.00 despite Jerome Powell delivering a hawkish commentary at the Jackson Hole Symposium last Friday. The corrective move has been gradual, therefore, chances of a bounce back are extremely solid.
- This week, investors will keenly focus on the US Nonfarm payrolls (NFP) data, which will be published on Friday at 12:30 GMT. In addition to that, ISM Manufacturing PMI for August will also remain in focus.
Technical Analysis: Pound Sterling upside remains restricted around 1.2600
Pound Sterling upside seems restricted near the round-level resistance of 1.2600 as the UK economy is exposed to a possible recession due to high-interest rates. The Cable delivered a breakdown of the three-week support at 1.2620 and is declining toward the 200-day Exponential Moving Average (EMA), which is trading at 1.2480. A bearish crossover delivered by 20 and 50-day EMAs warrants more weakness ahead. Daily momentum oscillators indicate that a bearish impulse has been activated.
Pound Sterling FAQs
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).
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.
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.
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.