- The British pound finds some support after a new four-day low, as there remains scope for further tightening of monetary policy by the Bank of England.
- The slowdown in achieving 2% inflation has increased the Bank of England’s hawkish line bets.
- The market mood remains risk averse in a context of growing tensions between Israel and Hamas.
The British Pound (GBP) finds a cushion, but the overall outlook remains vulnerable due to persistent inflation fears. The pair GBP/USD struggles for traction as the UK Consumer Price Index (CPI) report for September, released on Wednesday, showed inflation remains stubborn due to rising oil prices, services inflation and strong wage growth.
Inflation in the UK is the highest among the G7 economies. The decline in inflation towards the 2% target has lost steam, keeping policymakers at the Bank of England (BoE) in suspense. Meanwhile, market sentiment remains cautious due to lingering fears of Iran’s intervention in the Israel-Palestine conflict. Looking ahead, sterling’s valuation will be guided by UK retail sales data, due out on Friday. Economists expect retail sales to contract marginally in September.
Daily Market Moves Summary: Sterling Finds Buyers as US Dollar Corrects
- The British pound recovered after hitting a two-week low below 1.2100, while persistent price pressures continued to cloud the economic outlook.
- The UK’s Office for National Statistics (ONS) reported on Wednesday that monthly headline inflation had increased by 0.5%, while investors were forecasting a growth rate of 0.4%. In August, headline inflation grew by 0.3%. The annual general CPI data grew at a sustained rate of 6.7%, above expectations of 6.5%.
- The core inflation data, which eliminates the volatility of food and oil prices, slightly exceeded expectations. Core inflation stood at 6.1%, above the expected 6%, but slowed from the previous 6.2%.
- Persistent British inflation has fueled expectations of further tightening of monetary policy by the Bank of England. The slowdown in headline and core inflation has caused discomfort among those responsible for the Bank of England.
- Persistent fears of persistent inflation have intensified discussions about whether to raise the inflation target to 3%. According to the British think tank The Resolution Foundation, a higher inflation target would allow the central bank to reduce its borrowing and bond-buying needs, and would provide more stimulus.
- British Prime Minister Rishi Sunak has pledged to halve inflation by the end of the year, a commitment that appears elusive.
- The Production Price Index (PPI) for inputs slowed significantly to 0.4%, but rose a strong 0.4% for products, reflecting the consequences of rising wages and fuel prices.
- Looking ahead, investors will focus on retail sales data for September, due out on Friday at 06:00 GMT. According to estimates, retail sales are expected to contract by 0.1% monthly. This indicates that high inflation and borrowing costs have reduced real household incomes.
- Following US President Joe Biden, British Prime Minister Rishi Sunak arrived in Israel to meet with Prime Minister Benjamin Netanyahu.
- Market sentiment remains pessimistic as the risks of Iranian intervention in the Israeli-Palestinian conflicts escalate. Joe Biden affirmed on Wednesday that the United States is with Israel. Earlier, Iran warned that it would not be a bystander if the US supports Israel.
- The US dollar remains firm against risk currencies awaiting the speech of the president of the Federal Reserve (Fed), Jerome Powell. Powell is very likely to support the stance of keeping interest rates higher for a longer period to ensure the achievement of returning inflation to the 2% target.
- Jerome Powell may refrain from discussing the wisdom of further tightening monetary policy as rising US Treasury yields appear sufficient to reduce overall spending and investment.
Technical Analysis: British Pound Recovers Above 1.2100
The British pound falls below the round level of 1.2100. The overall outlook for GBP/USD is bearish as the deadly crossover of the 50-day and 200-day exponential moving averages (EMA) is intact. The 20-day EMA at 1.2230 continues to act as a roadblock for the sterling bulls. Momentum oscillators struggle to hold firm.
Pound Sterling FAQ
What is the Pound Sterling?
The British pound (GBP) It is the oldest coin in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded currency exchange (FX) unit in the world, with 12% of all transactions, which represents an average of $630 billion per day, according to 2022 data.
Its main trading pairs are the GBP/USD, also known as “Cable”, which represents 11% of FX, the GBP/JPY, or the “Dragon” as it is known to traders (3%), and the EUR /GBP (2%). The pound sterling is issued by the Bank of England (BoE).
How do Bank of England decisions influence the Pound Sterling?
The most important factor influencing the value of the Pound Sterling 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 BdE tries to contain it by raising interest rates, which makes access to credit more expensive for individuals and companies. Overall, this is positive for sterling, as higher interest rates make the UK a more attractive place for global investors to put their money.
When inflation falls too much 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 does 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 Pound.
A strong economy is good for the 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 sterling. Otherwise, if economic data is weak, the pound is likely to fall.
How does the trade balance affect the Pound?
Another important publication for the British Pound is the Balance of Trade. 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 wishing to purchase these goods. Therefore, a positive Net Trade Balance strengthens a currency and vice versa for a negative 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.
