British Pound Marks New Four-Day High on Markets Optimism

• Sterling stabilizes above 1.2600, supported by risk appetite sentiment.
• Demand for homes in the UK falls sharply due to rising mortgage rates.
• Investors expect the policy divergence between the Fed and the BoE to fade this month.

The British Pound (GBP) remains firm on Wednesday as higher risk appetite among market participants continues to enhance the appeal of risk sensitive assets. The GBP/USD pair remains well supported as investors expect the policy divergence between the Federal Reserve (Fed) and the Bank of England (BoE) to fade this year. Further interest rate hikes are expected from the BoE as core CPI data remains close to its all-time high.

In the battle against persistent inflation, the UK’s manufacturing activities and its property sector have been the main victims. British companies continue to operate at lower capacity due to poor demand prospects, and rising mortgage rates have forced homebuyers to postpone their purchases. The BoE’s Broadbent warned that inflation will not fade as quickly as it seemed despite softer energy and fuel prices.

Market Drivers: The Pound Recovers and the Dollar Falls Back

• The British Pound gathers strength to break above the immediate resistance of 1.2650 amid bullish sentiment in the markets.
• The pair locks in above 1.2600 as investors expect the monetary policy divergence between the Fed and the BoE to fade, while the former is expected to hold interest rates steady.
• In the current scenario, the Bank of England has no consolation in stopping its monetary policy tightening, as there is no evidence that core inflation in the UK will ease.
• UK core inflation is nominally lower at 6.9% from its all-time high of 7.1%, despite the BoE raising interest rates to 5.25%.
• At stake is a promise by British Prime Minister Rishi Sunak to cut inflation in half by the end of the year, which would keep the central bank on a path of tightening monetary policy.
• The main catalyst for persistent core inflation is strong wage growth in the UK economy. The UK unemployment rate rose to 4.2% in July, but wage growth held firm, indicating that companies are spending heavily to retain talent.
• This week, Bank of England Deputy Governor Ben Broadbent said inflation will not fade as quickly as it seemed, despite softer energy and fuel prices. He warned that interest rates will stay higher for longer.
• The BoE’s battle against stubborn inflation has had many consequences for the UK’s economic outlook. The repercussions of the rise in interest rates have spilled over into the real estate sector.
• British property website Zoopla forecast on Wednesday that new home buying in 2023 is on track to fall 21%, to its lowest level since 2012, as buyers postpone their purchases due to rising mortgage rates, Reuters reported. .
• An influential group of British parliamentarians has said they must take a tougher stance on China over its gross human rights abuses and help Taiwan build its defenses to deter a possible attack by Beijing, The Guardian reported.
• On Wednesday, the British pound strengthened on the back of bullish market sentiment, which was fueled by the release of the July JOLTS job postings in the US.
• The US Bureau of Labor Statistics reported Tuesday that employers invited applications for 8.82 million job openings, up from a June reading of 9.16 million. Market participants anticipated higher job openings at 9.46 million.
• A significant drop in demand for labor boosts hopes of “higher for longer” interest rates from the Federal Reserve (Fed) and defies expectations of further monetary policy tightening this year.
• Following the labor demand data, investors are focused on ADP employment change data for August, which estimates increases in private sector payrolls.
• The last four reports have produced figures well above the market consensus. This time around, the market consensus is for US private payrolls to rise to 195,000.
• Later this week, the Non-Farm Payrolls (NFP) and the ISM Manufacturing PMI will be released.

Technical Analysis: British Pound Approaching 1.2700

The British pound is struggling to stabilize above the 1.2600 round level resistance, taking advantage of the bullish sentiment in the markets. The pair is trading in the previous day’s range in anticipation of crucial US economic data, which will guide future direction. The overall trend remains weak as the 20 and 50 day EMAs have already crossed down.