- Pound Sterling jumps above 1.2700, supported by a risk-on mood.
- UK housing demand drops sharply due to rising mortgage rates.
- Investors hope that policy divergence between the Fed and BoE will vanish this month.
The Pound Sterling (GBP) extends recovery swiftly as a higher risk appetite among market participants continues to improve the appeal for risk-sensitive assets. The GBP/USD pair remains well-supported as investors hope that the policy divergence between the Federal Reserve (Fed) and the Bank of England (BoE) will vanish this year. More interest rate hikes from the BoE are in the pipeline as the core Consumer Price Index (CPI) data remains sticky near its all-time peak.
In the battle against persistent inflation, the UK’s factory activities and its property sector have been major victims. British firms continue to operate at lower capacity due to a poor demand outlook, and higher mortgage rates have forced homebuyers to postpone their purchases. The BoE’s Broadbent warned that inflation will not fade as quickly as it emerged despite soft energy and fuel prices.
Daily Digest Market Movers: Pound Sterling jumps as US Dollar weakens
- Pound Sterling gathers strength for a decisive break above the immediate resistance of 1.2650 amid an upbeat market mood.
- The asset secures an auction above 1.2600 as investors hope that the Fed-BoE policy divergence will vanish since the former is expected to keep interest rates steady.
- The BoE doesn’t have the comfort of pausing the policy-tightening spell in the current scenario as evidence that UK core inflation will loosen up is absent.
- UK core inflation is nominally lower at 6.9% from its all-time peak of 7.1% despite BoE raising interest rates to 5.25%.
- UK PM Rishi Sunak’s promise of halving inflation by year-end is at stake, which would keep the central bank on the policy-tightening path.
- The major catalyst behind persistent core inflation is the strong wage growth in the British economy. The UK’s jobless rate rose to 4.2% in July, but wage growth remained robust, which indicated that firms were heavily spending to retain talent.
- This week, BoE Deputy Governor Ben Broadbent said that inflation will not fade as quickly as it emerged despite soft energy and fuel prices. He warned that interest rates will remain higher for a longer period.
- BoE’s battle against stubborn inflation has come with plenty of consequences for the UK’s economic outlook. Repercussions of higher interest rates have widened to the property sector.
- UK property website Zoopla forecasted on Wednesday that new home purchases in 2023 are on course to decline by 21% to their lowest level since 2012 as homebuyers postpone their purchases due to higher mortgage rates, Reuters reported.
- An influential group of UK MPs stated that they must take a tougher stance on China over its severe human rights abuses and help Taiwan build its defenses to deter a potential attack from Beijing, reported by The Guardian.
- Major strength in the Pound Sterling on Wednesday came from bullish market sentiment, which was propelled by softer United States JOLTS Job Openings for July.
- US Bureau of Labor Statistics reported on Tuesday that employers invited applications for 8.827M vacancies vs. June’s reading of 9.165M. Market participants anticipated higher job openings at 9.465M.
- A significant drop in labor demand boosts hopes of ‘higher for longer’ interest rates by the Federal Reserve (Fed) and challenges expectations of further policy tightening this year.
- Meanwhile, US ADP’s Employment Change data for August landed at 177K, lower than estimates and the former release of 195K and 324K respectively.
- The last four ADP Employment reports were significantly above market consensus. This time, fresh payrolls were significantly lower due to higher interest rates by the Fed.
- Later this week, Nonfarm Payrolls (NFP) and ISM Manufacturing PMI will be keenly watched.
Technical Analysis: Pound Sterling climbs above 1.2700
Pound Sterling strives for a confident stabilization above the round-level resistance of 1.2700, capitalizing on bullish market sentiment. The Cable oscillates in the previous day’s range ahead of crucial US economic data, which will guide further direction. The broader trend is still weak as the 20 and 50-day Exponential Moving Averages (EMAs) have already delivered a bearish crossover.
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.
