- Pound Sterling faces an intense sell-off due to risk-off impulse and weak manufacturing activity data.
- Persistent US inflation dampens the market mood.
- The BoE is expected to keep interest rates unchanged for the second time in a row.
The Pound Sterling (GBP) dropped from a two-week high as the United Kingdom’s economic outlook weakened after factory output contracted for the second consecutive month. The GBP/USD pair surrendered the majority of recent gains as data from the US showed inflation remains persistent, denting the risk appetite of market participants. UK’s manufacturing and overall Industrial Production dropped in August as firms cut spending on labor and inventory due to a poor demand outlook.
More sell-off in the Pound Sterling is anticipated as Bank of England (BoE) policymaker Swati Dhingra supported a rate cut if economic growth remains below estimates. The UK is expected to remain on the backfoot compared with other G7 economies as it is struggling with higher interest rates, filthy trade relations with the European Union, and rising gasoline prices.
Regarding interest rate outlook, BoE Governor Andrew Bailey cited on Friday that the policy will remain sufficiently restrictive. The central bank is observing progress in inflation but there is still work left to do.
Daily Digest Market Movers: Pound Sterling weakens amid risk-off mood
- Pound Sterling resumes a downside journey as UK factory activity contracted for the second month in a row.
- UK firms reported a decline in manufacturing activity in August amid a bleak demand outlook in the domestic and overseas market.
- Monthly Industrial Production in August contracted at a higher pace of 0.7%, while investors forecasted a 0.2% decline. In the same period, Manufacturing Production decreased by 0.8%, double the expectations of a 0.4% drop.
- On an annual basis, Industrial Production increased 1.3%, below the estimates of 1.7% but higher than the former reading of 1%. The Manufacturing Production rose 2.8%, lower than expectations and July’s reading of 3.4% and 3.1%, respectively.
- While factory data remained weak, the monthly Gross Domestic Product (GDP) rose by 0.2% in August, as expected. In July, GDP contracted by 0.6%.
- The absence of sufficient evidence that the UK economy could rebound may keep the Pound Sterling on the backfoot.
- The UK economy is facing an economic shock, based on labor shortages, high interest rates, stubborn inflation, and poor trade relations with the European Union. This could force the Bank of England to keep interest rates unchanged for a second consecutive time in November.
- In September, the BoE surprisingly paused the rate-tightening spell after 14 back-to-back interest rate hikes to 5.25%, a move that confirmed that policymakers are worried about the economic outlook.
- According to the IMF forecasts, the UK will be the slowest-growing G7 nation next year.
- On Wednesday, BoE policymaker Swati Dhingra favored a sooner rate cut if the growth rate declines beyond expectations. She further added that the UK economy has already ‘flatlined’, and that almost 25% of the impact from higher interest rates has already been absorbed by the economy.
- After the UK factory activity data, investors will shift focus to the labor market data for August, which will be published on Tuesday.
- The market mood turned cautious on Thursday after the United States headline inflation data for September turned out to be more persistent than expected.
- Dampened market sentiment improved the appeal of the US Dollar. The US Dollar Index (DXY) discovered buying interest near 105.50 and recovered quickly to near 106.60.
- Investors are expecting that the Federal Reserve (Fed) could end the year by elevating interest rates one more time by 25 basis points (bps) to 5.50%-5.75% as the progress in taming inflation towards 2% seems to have slowed down.
Technical Analysis: Pound Sterling stabilizes below 1.2200
Pound Sterling struggles for a firm footing as hot US headline inflation dampens market sentiment. The outlook for the GBP/USD pair weakens as it failed to sustain above the 20-day Exponential Moving Average (EMA) at 1.2258. The broader Cable bias is bearish as the 50-day and 200-day EMAs have already delivered a death cross.
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.