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The Pound is trying to recover thanks to bullish market sentiment and mixed US data.

  • The British Pound resumes its bullish path as market sentiment turns upbeat following US jobs data.
  • UK inflation is the highest of the G7 economies due to labor shortages and strong wage growth.
  • Officials at the Bank of England warned that interest rates will stay higher for a longer period.

The British Pound (GBP) strengthens as investors see a spike in higher interest rates from the Bank of England (BoE). The pair GBP/USD discovers buying interest, as BoE policymakers, including Lieutenant Governor Ben Broadbent and Chief Economist Huw Pill, have warned that tight enough policy needs to be maintained for longer to lower the Consumer Price Index ( CPI) underlying up to the desired rate of 2%.

Investors hope that the UK economy will not be able to avoid a recession as rising interest rates are hitting the real estate sector and manufacturing activities hard. The UK economic outlook has deteriorated as core inflation nears its all-time high on labor shortages and strong wage growth. Meanwhile, the Bank of England is preparing to raise interest rates further in September. An interest rate rise of 25 basis points (bp) is expected, which will take interest rates to 5.50%.

Daily Summary of Market Movements: Pound Benefits from Mixed NFP Report

  • The British Pound stabilizes below the 1.2700 round level resistance as fears of a recession in the UK economy mount on the belief that the Bank of England (BoE) will keep interest rates higher.
  • UK inflation is the highest of the G7 economies and requires tighter interest rate policy for longer to ensure price stability.
  • BoE Deputy Governor Ben Broadbent warned this week that inflation will not fade as quickly as it seemed, despite weak energy prices.
  • Core inflation remains hovering around its all-time high of 7.1% as labor shortages and strong wage growth remain top concerns for BoE policymakers.
  • On Thursday, BoE chief economist Huw Pill said there are many ways to reduce inflation, one of which is to keep interest rates higher for longer.
  • Pill warned that there are cases for caution in inflation despite the fall in the headline rate. He also added that the economy is facing second-round inflationary effects and that inflation in services is evolving in a less benign way. In addition, core inflation is not showing a downward trend yet.
  • For September’s monetary policy, investors expect the central bank to consecutively raise interest rates by 25 basis points (bp), to 5.50%. It would be the 15th consecutive interest rate hike in the current tightening cycle.
  • On Wednesday, British Prime Minister Rishi Sunak received the resignation letter from British Defense Minister Wallace and appointed Grant Shapps as the new Defense Secretary.
  • The UK economic calendar remains light this week as investors focus on the S&P Global Manufacturing PMI for August, which will provide clues on the current state of factory activities. The economic data is expected to remain unchanged at 42.5 points.
  • Market sentiment remains bearish as US Non-Farm Payrolls (NFP) remained mixed.
  • The US Bureau of Labor Statistics ( ) reported that the August Unemployment Rate jumped sharply to 3.8%, versus estimates and the previous release of 3.5%. New Non-Farm Payrolls (NFP) were at 187,000, above expectations of 170,000 and the July reading of 157,000. Wage growth continues to expand, but at a slower growth rate.
  • Hopes for a pause in the Federal Reserve’s tightening policy improve as the US job market loses its appeal.
  • On Thursday, the US Department of Labor reported that people filing for unemployment benefits for the week ending August 25 fell to 228,000, versus expectations of 235,000 and a previous reading of 232,000.
  • Dollar Index (DXY) turns volatile but is holding on to gains near 103.50.

Technical Analysis: British Pound Seeks Stability Above 1.2700

Sterling consolidates near 1.2650 after a corrective move from the weekly high of 1.2746 as risk aversion momentum emerges. Cable fails to hold above the 20 and 50 day EMAs, indicating that investors are looking at pullbacks as a selling opportunity. If the asset falls below the crucial support of 1.2600, a further drop would ensue.

Source: Fx Street

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