- The British Pound recovers but the overall bias remains weak due to deteriorating demand from households and businesses.
- Following a series of contractions in manufacturing activity, the UK services sector contracted for the first time since January.
- Market sentiment remains subdued as investors worry about global recession fears.
The British Pound (GBP) weakened further after S&P Global reported that the UK service sector started to contract on weak demand from households and businesses in a high interest rate environment. The GBP/USD pair is attempting to rally after hitting a fresh 11-week low, although it could be used as a selling opportunity by market participants as general market sentiment is bearish.
The UK economy is expected to weaken further as the Bank of England (BoE) prepares to raise interest rates further to hone monetary tools against a persistently high underlying Consumer Price Index (CPI). Investors expect a 0.25% interest rate hike from the BoE on September 21, which will take interest rates to 5.50%.
Market Drivers: British Pound Falls on Bearish Market Sentiment
- The British Pound tries to recover after a fresh 11-week low near 1.2530, while the overall bias remains bearish as the UK economy becomes vulnerable due to the tightening monetary policy of the Bank of England (BoE).
- Following the decline in activity in UK factories, the service sector is also under pressure as rising interest rates and prices reduce demand from households.
- Corporate demand has also fallen due to faltering economic growth and sticky inflation, weighing on the economic outlook.
- S&P Global reported that the services PMI for August fell to 49.5 from the July reading of 51.5, but remained above estimates of 48.7. The economic data remains below the 50.0 threshold for the first time since January.
- It appears that the cooling effects of the BoE’s interest rate hike are affecting global spending and household and business confidence in the UK economy.
- Tim Moore, Director of Economics at S&P Global Market Intelligence, said: “Service providers saw their client spending reverse trend during the month of August, as rising borrowing costs, low confidence of businesses and the economic difficulties of households reduced sales opportunities.
- Meanwhile, Bank of England officials are preparing to raise interest rates for the fifteenth time in order to sharpen monetary tools in the battle against persistent inflation.
- The BoE will announce monetary policy on September 21. An interest rate rise of 25 basis points (bp) is expected, which will place interest rates at 5.50%.
- Market sentiment remains bearish as investors remain concerned about deteriorating global prospects in the battle against stubborn inflation.
- Risk-sensitive currencies face the fallout from interest rate hikes by their respective central banks, such as economic contraction and slowing job growth.
- The US dollar is subdued on Wednesday morning, but the overall bias remains bullish as US recession fears recede significantly.
- Goldman Sachs analysts see a 15% chance the US economy will enter a recession as inflation cools and job growth remains strong. Previously, recession expectations for the US economy stood at 20%.
- To know the evolution of the US dollar, we will have to pay attention to the ISM services PMI for August, which will be published at 14:00 GMT. The PMI is estimated to fall marginally to 52.5 from 52.4 in July.
Technical Analysis: British Pound falls back towards 1.2500
The British pound is trading within Tuesday’s range of 1.2530 to 1.2630 as investors await further guidance on the interest rate outlook. GBP/USD remains vulnerable after stabilizing below the 20 and 50 day EMAs. The pair is expected to extend its downside run and find intermediate support near the 200 day EMA, just below 1.2500. The momentum oscillators show that the bearish momentum is reinforcing again.
Frequently Asked Questions about the British Pound
What is the British Pound?
The British Pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded foreign exchange unit (FX) in the world, with 12% of all transactions, which represents an average of 630,000 million dollars a day, according to data from 2022.
Its main trading pairs are GBP/USD, also known as “Cable”, which represents 11% of FX, GBP/JPY, or the “Dragon” as traders know it (3%), and EUR. /GBP (2%). The pound sterling is issued by the Bank of England (BoE).
How do Bank of England decisions influence the British Pound?
The most important factor influencing the value of the British Pound is the monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its main objective of “price stability”, that is, a stable inflation rate of around 2%. Its main instrument to achieve this is the adjustment of interest rates.
When inflation is too high, the BoE tries to contain it by raising interest rates, which makes access to credit more expensive for individuals and companies. Overall this is sterling positive 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 that economic growth is slowing. In this scenario, the BoE will consider the possibility of lowering interest rates to make credit cheaper, so that companies borrow more to invest in growth-generating projects.
How do economic data influence the value of the Pound?
Data releases measure the health of the economy and can influence the value of the British Pound. Indicators such as GDP, manufacturing and services PMIs, and employment can influence the direction of the British pound.
A strong economy is good for the British pound. Not only does it attract more foreign investment, but it may encourage the Bank of England to raise interest rates, which will directly strengthen the British pound. Otherwise, if the economic data is weak, the British pound is likely to fall.
How does the trade balance affect the Pound?
Another important release for the British Pound is the trade balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports during a given period.
If a country produces highly sought after exports, its currency will benefit exclusively from the additional demand created by foreign buyers who want to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative trade balance.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
