Pound Sterling weakens amid disappointing UK economic data
- The Pound Sterling trades lower against the US Dollar as Fed Chair Powell signals caution on further policy easing.
- Fed’s Bowman argued in favor of reducing interest rates quickly to prevent further weakness in the job market.
- The UK’s overall business activity growth cooled down in September.
The Pound Sterling (GBP) declines to near 1.3485 against the US Dollar (USD) during the European trading session on Wednesday. The GBP/USD pair faces selling pressure as the Pound weakens following disappointing UK business activity data in September and the US Dollar rebounds after Federal Reserve (Fed) Chair Jerome Powell's speech on Tuesday, in which he reiterated caution on loosening the monetary policy further.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, recovers to near 97.45 after a two-day corrective move.
Powell signaled caution on interest rate cuts as the monetary policy needs a balancing act amid high inflation and a faltering job market, which he called a “challenging situation” for the central bank.
"Near-term risks to inflation are tilted to the upside and risks to employment to the downside - a challenging situation,’’ Powell said, and added that the current interest rate range leaves the central bank “well positioned to respond to potential economic developments”.
Contrary to Chair Powell’s comments, Governor Michelle Bowman signaled urgency on interest rate cuts amid a slowdown in the United States (US) job market. "If demand conditions do not improve, businesses may need to begin to lay off workers," Bowman warned.
Daily digest market movers: Pound Sterling weakens against its peers
- The Pound Sterling trades lower against its peers on Wednesday as United Kingdom (UK) business activity growth has slowed down in September. Flash S&P Global Composite Purchasing Managers Index (PMI) came in lower-than-expected at 51.0, against estimates of 52.7 and from 53.5 in August, indicating that overall business activity expanded, but at a moderate pace.
- The overall growth in business activity dropped due to continued weakness in the manufacturing sector. The S&P Global Manufacturing PMI contracted to 46.2, while it was expected to remain steady at 47.0. A figure below 50.0 is considered a contraction in business activity. The S&P Global Services PMI dropped to 51.9 from estimates of 53.5 and the prior reading of 54.2.
- The PMI report also signaled continued job losses and declining new business from global markets in the wake of the trade war, following the imposition of tariffs by the US on its trading partners.
- Signs of cooling UK job market conditions and declining overseas business activity could force the Bank of England (BoE) to become dovish on interest rates. Last week, the BoE held interest rates steady at 4% and retained its “gradual and careful” monetary easing guidance.
- The BoE maintained the status quo as the UK inflation has remained well above the central bank’s target of 2%. However, the BoE stated that price pressures are expected to peak at around 4% in September. On Tuesday, BoE Chief Economist Huw Pill expressed confidence that inflation will ease in the near term.
- Going forward, the GBP/USD pair will be influenced by the US Durable Goods Orders and the US Personal Consumption Expenditure Price Index (PCE) data for August, which will be released on Thursday and Friday, respectively.
Technical Analysis: Pound Sterling continues to face pressure from 20-day EMA
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The Pound Sterling drops to near 1.3485 against the US Dollar on Wednesday. The near-term trend of the GBP/USD pair remains bearish as the 20-day Exponential Moving Average (EMA) continues to act as a key barrier around 1.3523. The Cable trades near the lower end of a Rising Channel formation around 1.3470
The 14-day Relative Strength Index (RSI) has fallen sharply below 50.00. A fresh bearish momentum would emerge if the RSI breaks below 40.00.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the July 1 high near 1.3800 will act as a key barrier.
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, also known as ‘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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