- Sterling is testing the previous week’s lows as UK S&P global PMIs remained weak.
- UK factory activity fell for the 12th time in a row as the BoE raised interest rates aggressively.
- The economic outlook does not look promising as more interest rate hikes by the Bank of England are being prepared.
The Pound sterling (GBP) is giving up all of its gains released on Friday as the UK’s S&P Global PMI preliminary data for July missed expectations. The GBP/USD pair is falling as falling factory activity and a dismal services sector put pressure on the pound sterling. Britain’s economic outlook faces the wrath of increased inflation and higher interest rates Bank of England (BoE).
Businesses in the UK have delayed their current demand for credit to avoid paying higher interest liabilities. Earth economic outlook does not look promising as the Bank of England is expected to raise interest rates further in August. Going forward, employment conditions are expected to face pressure from weakening economic activity.
Daily Digest Market Movers: Sterling in action as July PMIs remain weak
- Sterling faces selling pressure as preliminary UK PMI data showed economic activity remained weaker than expected in July.
- UK Manufacturing PMI eased to 45.0, down from 46.1 expected and 46.5 registered in June. This signals the 12th consecutive decline in the country’s manufacturing sector. A number below 50.0 is considered a contraction.
- The preliminary UK services PMI fell to 51.5 versus consensus and earlier versions of 53.0 and 53.7.
- Economic activity appears to be facing the wrath of the Bank of England’s tight monetary policy.
- Investors are mixed on the extent to which the Bank of England will raise interest rates in August.
- Inflationary pressures in the UK look persistent, although the consumer price index (CPI) eased in June as consumer spending remains resilient.
- Monthly retail sales rose at a 0.7% pace in June, a bigger than expected 0.2% increase and an acceleration from the 0.1% recorded in May. On a year-over-year basis, consumer spending fell 1.0%, which was more modest than the estimate of a 1.5% decline and the previous release of a 2.3% decline.
- Despite the fall in inflation, consumer spending is picking up as lower gasoline prices provide households with more disposable income.
- Sales at food retailers were weak, possibly because spending on dining out was higher due to the extra public holiday to mark the coronation of King Charles.
- Resilient consumer spending momentum offset the comfort provided by surprisingly softer inflation data.
- Expectations of a big rate hike from the BoE in August have returned as positive retail demand could reignite inflationary pressures.
- Soft inflation in June offers relief to BoE policymakers, but pro-inflationary risks from elevated core inflation remain solid.
- The US Dollar Index (DXY) is making a northward break after an extended consolidation around 101.00 as investors remain cautious ahead of the Federal Reserve’s (Fed) monetary policy meeting.
- The Fed expects to raise interest rates by 25 basis points (bps), which will push interest rates to a range of 5.25% to 5.50%.
- Investors expect interest rates to peak on July 26 and then remain flat for the rest of the year.
- Investors will be watching the development of Fed interest rates. Hawkish leadership can create a risk-taking mood.
- U.S. consumer spending rose at a modest pace in June due to falling demand for big-ticket items.
Technical Analysis: Sterling corrects near 20-day EMA
Sterling is hitting stiff resistance below 1.2900 as market sentiment turns cautious. Cable is expected to test its recent low of 1.2816 recorded on Friday. Earlier, the asset staged a rally after measuring support below the 20-day exponential moving average (EMA). Cable would find further support near the 50-day EMA around 1.2700 if it continues to decline. The upward momentum has died down completely, but the long-term trend is still bullish.
Frequently asked questions about 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 foreign exchange (FX) unit in the world, accounting for 12% of all transactions, averaging $630 billion per day, according to 2022 data.
Its key trading pairs are GBP/USD aka ‘Cable’ which represents 11% of FX, GBP/JPY or ‘Dragon’ as it is known to traders (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
The single most important factor affecting 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 primary objective of “price stability” – a stable rate of inflation around 2%. Its primary tool to achieve this goal is the adjustment of interest rates.
When inflation is too high, the BoE will try to keep it in check 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 drops too low, it is a sign of slowing economic growth. In this scenario, the BoE will consider cutting interest rates to make credit cheaper so businesses borrow more to invest in growth-creating projects.
The data released assesses the health of the economy and can affect the value of the pound sterling. Indicators such as GDP, manufacturing and services PMI and employment can influence the direction of the GBP.
A strong economy is good for Sterling. Not only will this attract more foreign investment, but it may encourage the BoE to raise interest rates, which will directly strengthen the GBP. Otherwise, if the economic data is weak, the pound sterling is likely to fall.
Another important data release for the pound sterling is the trade balance. This indicator measures the difference between what a country earns on exports and what it spends on imports for a given period.
If a country produces a highly sought-after export, its currency will benefit purely from the extraordinary demand created by foreign buyers looking to buy those goods. Therefore, a positive net trade balance strengthens the currency and vice versa a negative balance.