- Pound Sterling trades directionless ahead of the monetary policy decision by both the Fed and the BoE.
- The BoE is expected to keep interest rates steady as slowdown fears mount.
- Stubborn UK inflation puts at risk Prime Minister Rishi Sunak’s pledge to halve inflation to 5.4% by year-end.
The Pound Sterling (GBP) registered lackluster moves on Wednesday as investors await monetary policy decisions from both the US Federal Reserve (Fed) and the Bank of England (BoE). The GBP/USD pair remains on tenterhooks as investors expect that the BoE will keep interest rates unchanged.
The near-term demand for the Pound Sterling looks vulnerable as investors seem to believe that the BoE will hold rates steady, prompted by fears of a slowdown in the UK economy, shrugging off still stubborn price pressures. Apart from the monetary policy decision, investors will look for guidance on interest rates going forward and the inflation outlook. UK Prime Minister Rishi Sunak vowed in January to halve inflation to 5.4% by year-end, a promise that looks challenging as annual price growth was at 6.7% in September, broadly unchanged since July.
Daily Digest Market Movers: Pound Sterling faces pressure amid cautious market mood
- Pound Sterling remains on the backfoot as the appeal for risk-perceived assets diminishes ahead of the monetary policy meeting by the Federal Reserve and ongoing Middle East tensions.
- Hamas announced that it will release hostages in the next few days, but a ceasefire is not expected as the Israeli Defense Forces (IDF) are looking to enter Gaza for a full-scale ground offensive.
- Apart from geopolitical tensions, caution among market participants ahead of the BoE meeting is keeping the Pound Sterling on tenterhooks.
- The BoE is expected to keep interest rates unchanged at 5.25% on Thursday. This would be the second straight time in which policymakers leave interest rates unchanged after 14 consecutive rate hikes.
- Investors doubt whether UK Prime Minister Rishi Sunak will fulfill his promise of halving inflation to 5.4% by year-end.
- Consumer inflation in the UK economy is the highest among G7 economies due to robust wage growth. In spite of persistent inflation risks, the BoE is expected to maintain the status quo as the economy is slowing down due to deteriorating labor demand.
- The UK Office for National Statistics (ONS) reported that employment shrank for the third time in a row in August, warranting upside risks to the Unemployment Rate.
- Other economic data pointing to weak consumer spending and declining business investment are also supporting a steady interest rate decision from the BoE.
- While robust wage growth continues to prompt price pressures, food price inflation dropped significantly in October. High inflation and soft labor demand forced households to spend less and save more amid a volatile environment.
- The British Retail Consortium (BRC) reported on Tuesday that food inflation declined for a sixth straight month. The food price index decelerated to 8.8% in October from 9.9% in September.
- The US Dollar Index (DXY) attempts to recover further despite US private payrolls failing to match expectations. The US ADP reported that private payrolls were lower at 113K than expectations of 150K but higher than September’s reading of 89K.
- Meanwhile, investors await the Fed’s monetary policy decision and the ISM Manufacturing PMI for October.
- The Fed is expected to keep interest rates in the range of 5.25%-5.50% but will deliver hawkish guidance as inflation in excess of 2% seems the most stubborn due to robust consumer spending, strong labor market conditions, and expectations of a revival in business activity.
- An upbeat private payrolls and factory activity report would strengthen the US Dollar as it would allow the Fed to keep interest rates elevated for a longer period.
- The survey of private factories done by S&P Global for October showed that the Manufacturing PMI came in at the 50.0 threshold, which separates expansion from contraction in factory activity.
Technical Analysis: Pound Sterling faces barricades 1.2150
Pound Sterling juggles around 1.2150 as investors await the monetary policy decision from both the Fed and the BoE. The near-term outlook remains bearish as the 20-day Exponential Moving Average (EMA) has been acting as a major barricade for the Pound Sterling bulls. Downward-sloping 50-day and 200-day EMAs indicate that the broader trend is extremely bearish. Momentum oscillators demonstrate a contraction in volatility.
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.
