- Pound Sterling finds buying interest while UK recession risks remain intact.
- UK Manufacturing PMI is expected to contract for the 14th time in a row.
- UK’s real estate inquiries increase as households see no more increase in mortgage rates.
The Pound Sterling (GBP) discovers stellar buying interest as investors digest upside risks to a recession in the United Kingdom. The GBP/USD pair rebounds meaningfully as market participants start admitting that the British economy has no other option than to operate with higher interest rates by the Bank of England (BoE) due to a hot-inflation environment. The strength in the Pound Sterling also came from a corrective move in the US Dollar.
After contracting for 13 months in a row, the UK’s Manufacturing PMI is expected to continue the declining spell as the BoE is quite clear about keeping interest rates higher long enough for inflation to come down to 2%.
Daily Digest Market Movers: Pound Sterling capitalizes on gradual correction in US Dollar
- Pound Sterling extends recovery to near 1.2220, supported by a gradual correction in the US Dollar as the risk-aversion theme loses resilience.
- The GBP/USD pair recovers after printing a fresh six-month low near 1.2100 as investors digest potential United Kingdom recession risks.
- The UK economy is exposed to the risk of a recession as labor market conditions have cooled down after corporations turned pessimistic about demand.
- Britain’s manufacturing and service sectors are facing the wrath of higher interest rates by the Bank of England (BoE). After a dismal Manufacturing PMI, the Services PMI also slipped into the contraction phase as households struggled to bear the burden of high inflation.
- The strength in the Pound Sterling also came from increasing queries about real estate as homebuyers think the BoE is done with hiking interest rates. The UK’s property website Zoopla said the volume of inquiries for new homes rose by 12% over the past four weeks.
- Lloyd Bank Business Barometer reported on Thursday that British business confidence fell to 36% in September from August’s reading of 41%, which was an 18-month high.
- Hann-Ju Ho, senior economist at Lloyds Bank Commercial Banking, clarified that the survey was conducted before BoE’s unchanged interest rate decision, which should have boosted confidence among employers. However, he warned that the economic environment remains uncertain with inflation and interest rate pressures playing their part. The recent decision by the central bank is likely to help businesses feel more upbeat about the future.
- Meanwhile, the UK’s National Statistics Office reported the final reading of real Gross Domestic Product (GDP) reading on Friday at 06:00 GMT. The real GDP remained in line with the previous estimate of 0.2% and 0.6% on a quarterly and annualized basis.
- Next week, investors will keenly focus on the S&P Global Manufacturing PMI report for September. UK factory activities are expected to continue remaining on a contracting trajectory for the 14th time in a row. A figure below the 50.0 threshold is considered a contraction in economic activities. The economic data is seen unchanged at 44.2.
- Investors’ risk-taking ability improves as the fourth quarter of 2023 begins, but upside risks to a global slowdown remain intact.
- The US Dollar is off from a 10-month high ahead of the Federal Reserve’s (Fed) preferred inflation gauge. As per estimates, the monthly core Personal Consumption Expenditure (PCE) price index is expected to maintain a steady pace of 0.2%. The annualized data is foreseen decelerating to 3.9% vs. July’s reading of 4.2%.
- Meanwhile, US labor market conditions are improving as US weekly Jobless Claims for the week ending September 22 were better than expectations. The US Department of Labor reported that individuals claiming jobless claims for the first time increased by 2K to 204K from the previous week’s release but remained lower than expectations of 215K.
Technical Analysis: Pound Sterling recovers strongly to near 1.2220
The Pound Sterling jumped close to 1.2220 after a breakout of the Bearish Wedge chart pattern formed in a smaller time frame. The GBP/USD pair recovered strongly and is expected to move to near the round-level resistance of 1.2300. A steady recovery in the Cable was propelled by oversold momentum oscillators. However, the broader trend is still bearish as all short-to-long-term Exponential Moving Averages (EMAs) are declining.
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.