- The British pound struggles to find direction as investors shift focus to third quarter GDP data.
- A poor GDP report would raise the pessimistic expectations of several Bank of England policymakers.
- Rising energy prices have reduced UK consumer spending.
The British pound (GBP) is stuck in a tight range as investors appear unwilling to build new positions ahead of the release of UK third quarter gross domestic product (GDP) data, released on Friday at 07:00 GMT. The GBP/USD pair remains in suspense as the third quarter GDP report will shape the Bank of England’s (BoE) December monetary policy outlook.
A drop in consumer spending, disappointing services PMI, postponed housing demand and contract take-up have set a negative tone for the UK’s economic performance in the July-September period. A poor GDP report would raise the pessimistic expectations of several Bank of England policymakers, especially Swati Dhingra, who favors cutting rates if the growth rate remains below expectations. The GDP data will be followed by employment and inflation data, which will be released next week.
Meanwhile, Bank of England chief economist Huw Pill said interest rates are needed to remain restrictive to ease inflationary pressures. No more interest rate increases are needed to support inflation.
Daily market moves: Sterling remains on the defensive amid risk-off mood
- Sterling consolidates in a tight range below crucial 1.2300 resistance level as investors await UK factory data for September and third quarter GDP data, which will inform December monetary policy decision by the Bank of England.
- The data is expected to show that manufacturing production rose 0.3% in the month of September compared to falling 0.8% in August. Year-on-year data is expected to show an increase of 3.1% versus 2.8% previously recorded.
- Industrial production is expected to show an increase of 0.1% compared to a fall of 0.7% in the previous period. The same data is expected to show an increase of 1.1% year-on-year compared to 1.3% previously.
- A rebound in factory data would ease fears of a slowdown in the UK economy.
- The event that will guide further action on the British Pound is the preliminary third quarter GDP data, which will be released at the same time as the factory data at 07:00 GMT.
- Economists have forecast a nominal contraction of 0.1% versus a growth rate of 0.2% in the previous April-June quarter. UK companies underutilized their production capacities to avoid building up unsold inventories amid a low demand environment.
- Data from the Office for National Statistics (ONS) showed consumer spending contracted in two out of three months in the third quarter as higher energy costs squeezed real household incomes.
- The UK economy is heavily reliant on the services sector – the services PMI contracted in every month in the last quarter.
- BoE policymaker Swati Dhingra, who supported keeping interest rates unchanged last week, could emphasize cutting rates sooner if the third-quarter GDP report turns out to be excessively weak.
- Earlier this week, Bank of England chief economist Huw Pill warned of the potential risks of an excessive slowdown, as the central bank has pledged to keep monetary policy sufficiently restrictive for a longer period until achievement of price stability.
- Huw Pill said rate cuts in mid-2024 “do not look totally unreasonable” and that a weak GDP report would prompt dovish expectations from the Bank of England.
- The US Dollar falls near 105.50 after failing to regain the crucial resistance at 106.00. Investors await Federal Reserve (Fed) Chairman Jerome Powell’s guidance on interest rates.
- This week, a balanced tone from Fed policymakers on the interest rate outlook has kept the US Dollar Index (DXY) broadly sideways in a range of 105.40-105.90.
Technical analysis: British pound remains below 1.2300
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The British Pound is trading lackluster near 1.2300 after correcting gradually over the last three sessions. The chances of a sterling recovery are decent.
The GBP/USD pair broke out of a symmetrical triangle chart pattern last week and the process of testing the breakout with gradual selling appears to be over. GBP/GBP has stabilized above the 20-day exponential moving average, but the 200-day EMA continues to act as a barricade.
British Pound FaQs
What is the pound sterling?
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 currency unit (fx) in the world, representing 12% of all transactions, with an average of $630 billion daily, according to 2022 data.
Its key trading pairs are GBP/USD, also known as ‘GBP’, which represents 11% of the currencies, GBP/JPY, or the ‘Dragon’ as it is known to traders (3%), and EUR /GBP (2%). The pound sterling is issued by the Bank of England (BoE).
How do the Bank of England’s decisions impact 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 Bank of England bases its decisions on whether it has achieved its main goal of “price stability” – a stable inflation rate of around 2%. Your main tool to achieve this is the adjustment of interest rates.
When inflation is too high, the Bank of England will try to curb it by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for the 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 that economic growth is slowing. In this scenario, the Bank of England will study the possibility of lowering interest rates to make credit cheaper, so that companies give more loans to invest in growth-generating projects.
How does economic data influence the value of the Pound?
The data release measures the health of the economy and can affect the value of the pound. Indicators such as GDP, manufacturing and services PMIs and employment can influence the direction of the GBP.
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 the GBP. Otherwise, if economic data is weak, the pound is likely to fall.
How does the trade balance affect the Pound?
Another significant data 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 prized exports, its currency will benefit exclusively from the additional demand created by foreign buyers seeking 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.
