- The British pound recovers strongly thanks to the good mood of the markets.
- The Bank of England is keeping interest rates stable to safeguard the economy from recession.
- Britain’s Rishi Sunak is expected to deliver on his promise to halve inflation to 5.4% by the end of the year.
The British pound (GBP) progressing rapidly as improving market sentiment outweighs prospects for stagnating growth in the UK economy. Market sentiment has become extremely optimistic after US labor demand slowed in October and the unemployment rate rose above expectations.
The short-term demand for the GBP/USD pair depends on the performance of the British economy in the fourth quarter of 2023. However, the latest information on the UK economy indicates that the manufacturing sector continued its recession in October due to rising borrowing costs and the cost of living crisis. This has put a negative background on the growth rate in the October-December period.
S&P Global reported that the services PMI improved to 49.5 versus expectations of 49.2 and the September reading of 49.3, but remained below the 50.0 threshold for the third consecutive month. The agency reported that new orders were the lowest since November 2022, as high consumer inflation has strained household budgets.
The Bank of England (BoE) kept interest rates unchanged at 5.25% for the second consecutive time on Thursday to avoid trampling on the limited growth that exists. There are signs that the economy is barely avoiding a recession. Business optimism has fallen to 10-month lows, forcing employers to make sharp cuts to payrolls, purchases and inventories. Regarding the inflation outlook, BoE Governor Andrew Bailey appears confident that the central bank can reduce inflation to 2% within two years.
Daily summary of market movements: The Pound recovers strongly and the Dollar falls
- The British Pound rises to around 1.2300 as softer-than-expected labor market data has improved risk appetite among market participants.
- The cheerful mood in the markets has dragged the US Dollar Index (DXY) vertically. According to the US NFP report, employers hired 150,000 job seekers in October, below expectations of 180,000 and the downwardly revised reading of 297,000 in September. The US unemployment rate rose to 3.9%.
- On Thursday, the GBP/USD pair took the Bank of England’s interest rate decision positively and rose to 1.2220.
- BOE policymakers Megan Greene, Jonathan Haskel and Katherine Mann voted in favor of a 25 basis point (bp) rate hike, while the other six policymakers advocated maintaining the status quo.
- The rise of the Pound sterling was limited by the Bank of England’s decision to keep interest rates at 5.25%, amid fears that the economy would enter a recession.
- The growth rate in the coming quarters is expected to remain stagnant due to tensions in the Middle East, deteriorating demand for labor, weak demand prospects, weak consumer spending and poor market conditions. real estate.
- S&P Global reported that the British manufacturing recession continued into the final quarter of the year, meaning the manufacturing sector remains a drag on an economy already teetering on the brink of recession.
- Regarding interest rate guidance, BoE Governor Andrew Bailey warned that the central bank will keep interest rates high long enough to remove price pressures above the 2% inflation target. .
- Andrew Bailey kept the door open to further tightening of monetary policy and ruled out hopes of a short-term rate cut as inflation in the British economy is the highest of the G7 economies.
- The BOE’s inflation forecast was for headline inflation to soften to 4.6% in the fourth quarter of 2023. One- and two-year forward inflation will slow to 3.1% and 1.9%, respectively.
- The central bank’s new inflation forecasts indicate that British Prime Minister Rishi Sunak will deliver on his promise to halve inflation to 5.4% by the end of the year.
- Meanwhile, worsening tensions in the Middle East keep global economies in suspense. The Israeli army has confirmed that its troops have encircled Gaza and that a cessation of hostilities is not at all likely.
- US Secretary of State Anthony Blinken has arrived in Israel for talks to stop the ground invasion by the Israeli Defense Forces (IDF), ensure the delivery of humanitarian aid and take concrete measures to protect the hostages.
Technical Analysis: British Pound Approaches 1.2300
The British Pound jumps vertically towards the resistance of the 1.2300 round level amid improving market sentiment. The GBP/USD pair has attempted to break out of the symmetrical triangle pattern formation on the daily time frame, which will lead to an expansion in volatility. The Pound is trying to stabilize above the 20-day EMA at 1.2186. If the GBP/USD pair achieves this, short-term demand for the British pound is likely to turn positive.
Pound Sterling FAQ
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 exchange (FX) unit in the world, representing 12% of all transactions, with 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 that influences 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 the British pound, as higher interest rates make the UK a more attractive place for global investors to park 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 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 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.
