Pound Sterling discovers support as strong US GDP improves sentiment

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  • Pound Sterling is declining toward a seven-month low as Israel-Palestine tensions dampen the market mood.
  • Labor demand in the UK has started facing the repercussions of poor business activity.
  • A steady interest rate decision is anticipated from the BoE to avoid a recession.

The Pound Sterling (GBP) recovered against the US Dollar after upbeat US Q3 Gross Domestic Product (GDP) data. Earlier, the GBP/USD pair was facing intense selling pressure amid dismal market sentiment due to escalating tensions in the Middle East combines with a poor economic outlook for the United Kingdom. The near-term appeal for the Pound Sterling is downbeat as labor market conditions and business activity in the UK region are deteriorating due to a decline in new business orders.

A string of weak economic indicators from the UK economy have dented expectations of more interest rate hikes from the Bank of England (BoE). The central bank is expected to keep interest rates unchanged at 5.25% to avoid further economic casualties. The BoE is widely anticipated to keep interest rates unchanged as a further increase in borrowing costs could push the economy into a recession. 

Daily Digest Market Movers: Pound Sterling recovers as US yields edge down

  • Pound Sterling recovers strongly as the robust growth rate in the US economy in the July-September quarter has improved market sentiment.
  • The US Bureau of Economic Analysis has reported that the economy grew at a stronger pace of 4.9%, on an annualized basis, in the third quarter of 2023 against expectations of 4.2%. In the second quarter, the US economy registered a growth rate of 2.1%.
  • The broader market mood remains risk-off as Israeli Prime Minister Benjamin Netanyahu reiterated on Wednesday that his troops are preparing for a ground incursion to eliminate Hamas in Gaza with the goal of ‘saving the nation’.
  • Benjamin Netanyahu further added that he won’t share the details of when the incursion will begin but that the army will destroy the Palestinian military group. 
  • Escalated risks of widening the Israel-Palestine conflict have dampened the appeal of risk-perceived assets.
  • In addition to the dismal market mood, the deteriorating outlook of the UK economy has resulted in an intense sell-off in the Pound Sterling.
  • A survey from S&P Global in October showed that UK business activity remains in the contraction phase as firms are operating at lower capacity due to poor demand in the domestic and overseas market. 
  • UK firms are heavily relying on inventory backlog to cater current needs of customers due to pessimism over the demand outlook.
  • “The UK economy continued to flirt with a recession in October, as the increased cost of living, higher interest rates, and falling exports were widely blamed on a third month of falling output, according to Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.
  • The repercussions of weak business activity are impacting visibly on the labor market as UK employers shed jobs for the third time in a row. The UK Office for National Statistics (ONS) reported that 82K employees lost jobs in August. Also, the Claimant Count Change rose sharply by 20.4K in September.
  • Going forward, investors will focus on the interest rate decision by the Bank of England (BoE), which will be announced on November 2.
  • Due to weak consumer spending, poor business activity, and deteriorating labor market conditions, BoE policymakers are expected to keep interest rates unchanged at 5.25% for the second time.
  • Investors remain worried about the inflation outlook with three months left for the UK Prime Minister to fulfill his promise of halving inflation to 5.4% by the year-end. 
  • Meanwhile, the US Dollar has faced selling pressure after the release of the upbeat GDP data.
  • The broader demand for the US Dollar remains upbeat as the US economy is resilient despite higher interest rates by the Federal Reserve (Fed), unlike other economies that are struggling for a firm footing in a high-interest rate environment.
  • The S&P Global survey showed that US business activity in the private sector reported an uptick in October. The business sentiment improved on expectations that the Fed is done with hiking interest rates.
  • In the meantime, investors await the core Personal Consumption Expenditure (PCE) inflation data, which will be published on Friday. This could impact the decision-making by the Federal Reserve (Fed) policymakers for the monetary policy meeting on November 1.

Technical Analysis: Pound Sterling aims sustainability above 1.2100

Pound Sterling rebounds after defending the seven-month low at around 1.2040 on downbeat market sentiment. The GBP/USD pair is still exposed to psychological support at the key round number 1.2000 as the overall trend is bearish. The near-term trend for Cable is bearish as the 20 and 50-day Exponential Moving Averages (EMAs) are sloping south. Momentum oscillators have slipped into the bearish range again, which indicates that a fresh downside cycle has started.

BoE FAQs

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.



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