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Pound Sterling struggles to extend recovery ahead of UK/US inflation data

November 13, 2023| Forex Market


  • Pound Sterling finds interim support as UK economic growth was flat in Q3 against expectations of a decline.
  • Investors await the UK employment and inflation data for further guidance.
  • UK firms cut heavily on investments in Q3 due to a poor demand outlook.

The Pound Sterling (GBP) discovers some optimism as the UK economy manages to avoid a decline in economic activities in the third quarter. The GBP/USD attempts a recovery on temporary optimism but projections for the growth outlook are downbeat as fresh investments from firms in capacity expansion in the last quarter were significantly down due to poor demand from the domestic and overseas markets.

Bank of England (BoE) policymakers: Huw Pill and Katherine Mann are worried about the knock-on effects of higher interest rates in the battle against sticky inflation and are expected to endorse earlier rate cuts, due to deepening recession fears. Forward action in the Pound Sterling will be directed by UK labor market data, which will be published on Tuesday at 07:00 GMT. Investors would keep hiring and wage growth indicators on their radar.

Daily Digest Market Movers: Pound Sterling capitalizes on quite risk impulse

  • Pound Sterling remains cushioned above 1.2200 ahead of the UK Employment and inflation data, which will be published on Tuesday and Wednesday, respectively.
  • The GBP/USD pair discovers intermediate support near 1.2200 as the UK economy manages to avert a decline in the third quarter of 2023, remaining stagnant instead.
  • Preliminary Total Business Investment in Q3 has contracted strongly by 4.2% against expectations of a 3.5% decline. In the Q2 quarter, the long-term spending by firms rose by 4.1%.
  • This has set a negative undertone for the Q4 Gross Domestic Product (GDP) as lower business investment indicates weak confidence of firms in the overall demand by domestic and external players.
  • The outlook for the UK economy is downbeat as the cost-of-living crisis has deepened due to higher borrowing costs by the Bank of England, easing labor market conditions, and persistent price pressures.
  • UK factory data released on Friday indicated that monthly Industrial Production remained stagnant in September and Manufacturing Production expanded at a slower pace of 0.1% against expectations of 0.3%.
  • In the latest forecasts, the BoE projected that the economy will be stagnant in the next two years and a mere 0.1% growth will be seen in 2026.
  • Last week, BoE Chief Economist Huw Pill warned that higher interest rates for a sufficiently longer period to tame inflationary pressures could result in an excessive slowdown in the economy. 
  • The deepening pressures of higher interest rates could force the BoE to consider cutting rates earlier than expected. While discussing cutting rates, Pill said that he expects rate cuts in mid-2024.
  • Higher borrowing costs have dampened the affordability of investing in the housing sector. UK property website Rightmove said that asking prices for homes have fallen at their fastest pace in five years for the time of year, reported Reuters.
  • Further action in the Pound Sterling would be guided by the labor data, which is scheduled for Tuesday. 
  • As per the consensus, the Unemployment Rate in the three months ending September is seen unchanged at 4.2%. The Claimant Count Change for October rose by 15K, lower than 20.4K reading from September.
  • Apart from employment numbers, investors will keenly focus on the wage data for the July-September period, which has been a major reason behind stubborn inflation in the UK economy. According to the estimates, Average earnings excluding bonuses eased to 7.7% from 7.8% earlier. The wage data including bonuses softened sharply to 7.4% vs. the former reading of 8.1%.
  • Meanwhile, the geopolitical tensions remain escalated as Israeli Prime Minister Benjamin Netanyahu has rejected ceasefire proposals unless it includes the release of all hostages captured by Hamas.
  • The US Dollar Index (DXY) continues to face pressure near 106.00 despite Federal Reserve (Fed) Chair Jerome Powell saying he doesn’t consider current interest rates adequate to tame price pressures. 
  • Investors await the US inflation data for October, which will be published on Tuesday. The US price index data will provide cues for further monetary policy action by the Fed.

Technical Analysis: Pound Sterling recovers to near 1.2240

Pound Sterling remains cushioned near the round-level support of 1.2200. The likelihood of a bullish reversal from the GBP/USD pair is high as the gradual correction after a breakout from the symmetrical triangle formed on a daily timeframe seems concluded. The 20-day Exponential Moving Average (EMA), which trades around 1.2230 is offering support to the Pound Sterling bulls. The broader appeal for the Cable is still bearish as the 50 and 200-day EMA are sloping south.

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.

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