- Pound Sterling struggles to extend upside amid multiple headwinds.
- Despite a significant improvement, the UK Services PMI failed to conquer the 50.0 threshold.
- Andrew Bailey remains confident of bringing down inflation to 5% or below by year-end.
The Pound Sterling (GBP) fails to extend upside as the US Dollar recovers and weaker-than-anticipated Construction PMI data. The S&P Global reported the Construction spending at 45.0 in September, much lower than expectations of 49.9 and the former release of 50.8. A figure below the 50.0 threshold is considered a contraction in the construction activities. A decline in construction spending was widely anticipated as higher mortgage rates have forced households to postpone their demand for new houses. The impact of weak Construction PMI data is expected to remain limited as it is relatively a smaller part of the UK economy.
Earlier, the Pound Sterling recovered from 1.2050 as the appeal for risk-perceived assets improved. The upside in the GBP/USD pair seems limited as the United Kingdom’s economy is approaching a slowdown due to vulnerable economic activities, potential inflation shocks, and deteriorating demand.
In spite of an improvement in the UK Services PMI, the economic data remains below the 50.0 threshold, suggesting a contraction. The UK economy is failing to absorb the consequences of higher interest rates by the Bank of England (BoE), rising oil prices, and supply chain disruptions due to the Russia-Ukraine war.
Daily Digest Market Movers: Pound Sterling juggles despite weak Construction PMI
- Pound Sterling aims to extend upside toward the round-level resistance of 1.2200 as the US Dollar shifts on the backfoot after the release of the weaker-than-anticipated US ADP Employment Change data.
- A decline in appeal for the US Dollar has improved market sentiment and en-route investment into the risk-perceived assets.
- The GBP/USD pair made a recovery attempt on Wednesday after a better-than-projected UK Services PMI for September.
- S&P Global reported that the Services PMI remained below the 50.0 threshold for the second straight time but outperformed expectations meaningfully.
- The Services PMI landed at 49.3, higher than expectations and the former release of 47.2. S&P Global reported that the improvement came in the economic data due to sustained easing of inflationary pressure. Several businesses were optimistic as the Bank of England paused the policy-tightening spell.
- The data-collecting agency warned that the broader outlook is still sluggish amid higher borrowing costs and a weak order book due to subdued economic conditions. British producers have cut back on new orders and labor due to tepid demand. Rising oil prices and supply chain disruptions could keep the UK economy on the backfoot.
- Meanwhile, BoE Governor Andrew Bailey warned about potential inflation shocks but remained confident of bringing down inflation to 5% or less by year-end. Andrew Bailey opposed changing the UK’s 2% inflation target.
- Earlier, BoE policymaker Katherine Mann also warned that policymakers are facing a “world where inflation shocks are likely to be more frequent” with stronger price growth, meaning interest rates will need to be permanently higher.
- The US Dollar Index (DXY) finds an intermediate cushion near 106.50, but a volatile action is widely anticipated as investors shift focus to the September Nonfarm Payrolls (NFP) report after weak ADP job data.
- ADP reported that fresh additions of private payrolls in September were halved to 89k from the August reading. Investors already anticipated lower hiring at 153k.
- Soft labor market data is expected to fade expectations of one more interest rate hike from the Federal Reserve (Fed) in the remainder of 2023, which were supported by Cleveland Fed Bank President Loretta Mester and Fed Governor Michelle Bowman.
- The US ISM Services PMI matched expectations at 53.6 but remained below the August reading of 54.5. New Orders dropped significantly to 51.8 against the former release of 57.5.
Technical Analysis: Pound Sterling’s volatility squeezes near 1.2150
The Pound Sterling demonstrates a volatility squeeze after recovering to near 1.2150. The GBP/USD outlook turns vulnerable as the 50 and 200-day Exponential Moving Averages (EMAs) have delivered a Death Cross, which warrants more downside. A confident downside move could drag the Cable toward the psychological support of 1.2000. Momentum oscillators indicate signs of an oversold situation, but the further downside cannot be ruled out.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
