- Pound Sterling trades lacklustre ahead of S&P Global UK Manufacturing PMI data.
- UK factory activities could be lower-than-projected due to festive mood.
- The BoE may start reducing interest rates earlier due to deepening recession fears.
The Pound Sterling (GBP) trades back and forth inside Friday’s range as investors are gradually returning to the trading arsenal after a festive week. The GBP/USD pair is expected to show some action after the release of the S&P Global Manufacturing PMI for December. A steady performance is anticipated in the factory data as workers remained on holiday due to festive mood.
Major action in the Pound Sterling would come from investor speculation regarding the timing of possible rate cuts by the Bank of England (BoE). Market participants currently expect the BoE to start cutting interest rates from May given the United Kingdom economy is exposed to a technical recession. BoE policymakers have been refraining themselves from endorsing interest rate-cut up until now but a likely recession could force them to start discussions about reducing interest rates.
Daily Digest Market Movers: Pound Sterling juggles while US Dollar advances
- Pound Sterling struggles for direction as investors await the United Kingdom’s S&P Global Manufacturing PMI for December, which will be published at 09:30 GMT.
- The economic data is seen remaining unchanged at 46.4. Manufacturing activities in the UK economy are expected to remain muted due to holiday mood in December.
- In addition to that, British firms were operating on lower capacity due to weak demand from the domestic economy and the overseas market.
- Higher interest rates by the Bank of England and underlying price pressures have narrowed pockets of households.
- Broadly, the Pound Sterling has performed well against the US Dollar as the appeal of risk-perceived assets remain upbeat.
- However, the strength in the Pound Sterling could be hampered as the UK is at risk of a technical recession.
- As per the latest estimates from the UK Office for National Statistics (ONS), the UK economy shrank by 0.1% in the third quarter of 2023.
- The BoE is not expecting any growth in the final quarter of 2023. If the UK economy contracts in the October-December period, it will signal a technical recession (two consecutive quarters of negative growth).
- Contrary to UK ONS GDP data, Finance Minister Jeremy Hunt said that the outlook of the economy is not as bad as the data suggested.
- The case of a recession in the UK economy would compel BoE policymakers to consider rate cuts earlier than previously projected.
- Market participants hope that the BoE may start reducing interest rates from May from a previously projected August.
- Later this week, investors will focus on the S&P Global Services PMI data for December, which will be published on Thursday. The economic data is seen steady at 52.7.
- On the US Dollar front, the US Dollar Index (DXY) recovers further to near 101.50 as investors shift focus towards the ISM Manufacturing and Services PMI and labour market data, which will be published this week.
- The broader appeal of the US Dollar is bearish as market participants hope that the Federal Reserve (Fed) will be the first among the Group of Seven economies, to start a rate-cut campaign.
- Investors see the Fed reducing interest rates by 25 basis points (bps) to 5.00-5.25% from March and one more rate cut is anticipated in May.
Technical Analysis: Pound Sterling trades inside Friday’s range
Pound Sterling demonstrates a sheer contraction in volatility around 1.2730 as investors are slowly returning to trading after a festive week. Also, investors await fresh triggers for a meaningful reaction in the FX domain.
On a daily time frame, the GBP/USD pair continues to stay above the 20-day Exponential Moving Average (EMA), which indicates that near-term demand is bullish. Momentum oscillators struggle to sustain in the bearish trajectory.
What is the Pound Sterling?
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data.
Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
How do the decisions of the Bank of England impact on the Pound Sterling?
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates.
When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for 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 economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
How does economic data influence the value of the Pound?
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP.
A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
How does the Trade Balance impact the Pound?
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.
If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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