- The Pound Sterling slightly recovers against its major peers after the UK ONS reported robust factory data and expected GDP growth in August.
- Traders expect the BoE to cut interest rates in at least one of its two policy meetings remaining this year.
- Investors await the US PPI data for fresh cues on the Fed’s interest rate outlook.
The Pound Sterling (GBP) moves lower against its major peers in Friday’s London session after the release of the UK data. The initial reaction from the British currency was positive, however, it failed to capitalize on the same despite the data came in better than expected, and the Gross Domestic Product (GDP) grew expectedly in August.
The Office for National Statistics (ONS) reported that the economy grew by 0.2%, as expected, after remaining flat in July. Month-on-month Manufacturing and Industrial Production rose at a robust pace of 1.1% and 0.5%, respectively, while economists expected them to grow by 0.2%.
Annually, Manufacturing and Industrial Production contracted by 0.3% and 1.6%, respectively. However, the pace at which both economic data declined was slower than in July.
Upbeat monthly factory data and an expected GDP growth have improved the UK economic outlook. This would allow the Bank of England (BoE) policymakers to follow a shallow policy-easing cycle. Financial market participants expect the BoE to cut interest rates only once in the remaining two policy meetings this year.
Going forward, the next trigger for the Pound Sterling will be the UK Employment data for the three months ending August and the Consumer Price Index (CPI) report for September, which will be published on Tuesday and Wednesday, respectively. The economic data will significantly influence market expectations for BoE’s likely interest rate action in November.
Daily digest market movers: Pound Sterling remains weak against US Dollar ahead of US PPI
- The Pound Sterling edges lower against the US Dollar (USD) on Friday. The GBP/USD pair trades slightly above the monthly low of 1.3010, but the outlook is cautious as the Greenback remains firm. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto gains near 103.00.
- The US Dollar clings to gains as hotter-than-expected United States (US) Consumer Price Index (CPI) data for September kept the scope of the Federal Reserve (Fed) to reduce interest rates by 50 basis points (bps) again in the November meeting off the table.
- Thursday’s CPI report showed that the annual core inflation – which excludes volatile food and energy prices – accelerated to 3.3%. The headline inflation rose by 2.4%, faster than estimates of 2.3% but slower than the August print of 2.5%.
- However, traders are confident that the Fed will cut interest rates next month but at a gradual pace of 25 bps, according to the CME FedWatch tool. Also, a majority of Fed policymakers see more rate cuts as appropriate.
- On Thursday, New York Fed Bank President John Williams said at an event at Binghamton University, “Based on my current forecast for the economy, I expect that it will be appropriate to continue the process of moving the stance of monetary policy to a more neutral setting over time.”
- On the economic data front, investors will focus on the US Producer Price Index (PPI) data for September, which will be published at 12:30 GMT. The annual headline PPI is estimated to have decelerated to 1.6% from 1.7% in August. On the contrary, the core PPI – which strips off volatile food and energy prices – is expected to have accelerated at a faster pace to 2.7% from 2.4% in August.
Technical Analysis: Pound Sterling stays below 20- and 50-day EMAs
The Pound Sterling remains under pressure near the monthly low of 1.3010 against the US Dollar. The outlook of the GBP/USD pair is vulnerable as it has stabilized below the upward-sloping trendline plotted from the 28 December 2023 high of 1.2827.
The near-term trend of the Cable has become bearish as it trades below the 20- and 50-day Exponential Moving Averages (EMAs), which trade around 1.3167 and 1.3106, respectively.
The 14-day Relative Strength Index (RSI) declines to near 40.00. More downside would appear if the momentum oscillator falls below the above-mentioned level.
Looking up, the round-level resistance of 1.3100 and the 20-day EMA near 1.3170 will be a major barricade for Pound Sterling bulls. On the downside, the Pound Sterling would find support near the psychological figure of 1.3000.
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, also known as ‘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.
