- Pound Sterling is expected to deliver more upside amid a risk-on market mood.
- The UK economy is seen marginally contracting in Q3 due to higher interest rates – a negative for Pound Sterling.
- Deepening Middle East tensions could keep the broader risk profile negative.
The Pound Sterling (GBP) looks set to deliver a fresh upside as the market mood is supportive for risk-sensitive assets. The GBP/USD pair is aiming for more upside as investors hope that the policy divergence between the Federal Reserve (Fed) and the Bank of England (BoE) will not widen further since they are both sufficiently restrictive to ensure price stability.
Further action in the Pound Sterling could be guided by the preliminary Q3 Gross Domestic Product (GDP) for 2023, which will be published later this week. Economists project a marginally negative Q3 GDP as UK firms cut heavily on workforce and inventories due to a poor demand environment. Business investment is expected to remain lower in the July-September quarter as firms postpone their plans for capacity expansion to avoid higher borrowing costs.
Daily Digest Market Movers: Pound Sterling awaits UK Q3 GDP
- Pound Sterling gathers strength for a fresh upside above the immediate resistance of 1.2400 as the market sentiment is quite upbeat on hopes that the Federal Reserve (Fed) will not raise interest rates further.
- Improved market sentiment has strengthened demand for risk-perceived assets. While the US Dollar is expected to extend downside further.
- The GBP/USD pair refreshes a six-week high after US labor demand softened in October, triggering a risk-on impulse.
- The strength in the GBP/USD pair is backed by an intense sell-off in the US Dollar. Therefore, the pair could lose gains once the cleansing of longs in the Dollar is done.
- Pound Sterling recovered significantly last week after the Bank of England (BoE) paused interest rates, leaving them unchanged at 5.25% for the second time in a row.
- Fresh inflation forecasts from the BoE indicated that consumer inflation would come down to 4.6% by the year-end.
- This indicated that the UK Prime Minister Rishi Sunak would manage to accomplish his promise of halving inflation to 5.4% by 2023 ends. UK Sunak promised to halve inflation in January when inflation was at 10.7%.
- This week, investors will keenly focus on the preliminary Q3 GDP for 2023. Economists expect the economy to have contracted by 0.1% against 0.2% growth in the April-June quarter.
- Weak projections for the July-September quarter are based on deteriorating demand conditions due to higher interest rates and the deepening cost of living crisis.
- Business optimism has dropped to a 10-month low due to higher interest rates, which has forced companies to make heavy cuts to employment, purchasing, and inventories.
- The upside risks to Middle East tensions escalate as Israeli Prime Minister Benjamin Netanyahu rejected calls for a ceasefire when meeting with the US Secretary of State Antony Blinken on Friday.
- Meanwhile, investors await S&P Global Construction PMI for October, which will be published at 09:30 GMT. The economic data is seen declining to 44.5 from 45.0 released in September.
- The US Dollar Index (DXY) remains vulnerable as the US economy has started feeling the burden of higher interest rates by the Fed. US labor demand remained weak in October. Employers hired 150K job seekers, which were lower than expectations of 180K and upwardly revised September’s reading of 297K.
- The Services PMI, which gauges activity in the US service sector – a sector that accounts for two-thirds of the US economy-declined to 51.8 against expectations of 53.0, and a 53.6 reading from September.
Technical Analysis: Pound Sterling rises to near 1.2400
Pound Sterling prepares for a fresh upside above the immediate resistance of 1.2400 amid improved market sentiment. The near-term trend for the GBP/USD pair turns bullish as it has delivered a breakout of the Symmetrical Triangle chart pattern formed on a daily timeframe. The Cable has climbed above the 20 and 50-day Exponential Moving Averages (EMAs) and has come closer to the 200-day EMA, which trades around 1.2400.
Pound Sterling FAQs
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).
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.
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.
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.