Pound Sterling rebounds as central bank could announce pause sooner

• Pound Sterling finds support amid quiet market mood, UK factory data eyed.
• It is expected that the United Kingdom economy could avoid recession.
• UK’s GDP is seen growing in Q2 despite the aggressively restrictive monetary policy.

The Pound Sterling (GBP) finds support despite sheer silence in the market ahead of crucial economic data. The GBP/USD pair looks well-supported for now as investors hope that the British economy could avoid recession due to easing inflationary pressures and declining consumer spending. Domestically, Friday’s factory data and Q2 Gross Domestic Product (GDP) figures will be in focus.

Investors would be eager to know how effectively firms are handling the impact of higher interest rates by the Bank of England (BoE). Market participants anticipate that United Kingdom’s GDP grew in the April-June quarter despite aggressively tight monetary policy. Also, production activities remained on a recovery path, demonstrating resilience in the economy.

Daily Digest Market Movers: Pound Sterling awaits UK factory data

• Pound Sterling manages to sustain above 1.2700 as investors await factory data for June and Q2 GDP data, which will be published on Friday at 06:00 GMT.
• Per estimates, monthly GDP expanded by 0.2% in June against a contraction of 0.1%. Preliminary GDP data for the April-June quarter is seen as stagnant versus a nominal expansion of 0.1% recorded for Q1. Annual GDP is forecast to be expanding at a steady pace of 0.2%.
• According to consensus, Monthly Industrial Production expanded by 0.1% against a steep contraction of 0.6% recorded for May. Annually, the economic data is seen at -1.1%, against the former release of -2.3%.
• Meanwhile, Manufacturing Production grew at 0.2% in June versus a contraction by a similar figure in May. Annual data expanded by 0.3% against -1.2%.
• Preliminary consensus for United Kingdom factory data indicates a recovery despite aggressive policy tightening by the Bank of England.
• A recovery in the UK Manufacturing sector would ease recession fears but more interest rate hikes from the central bank will remain warranted.
• BoE policymakers cannot announce victory over inflation as the current UK Consumer Price Index (CPI) is almost four times the required rate of 2%. Therefore, further policy tightening cannot be ruled out.
• About the interest rate outlook, MUFG said that softening in the labor market and recent retail sales data showing slower consumer spending is “certainly strengthening the case for the BoE to possibly pause its tightening cycle,”
• It is expected that the promise made by UK PM Rishi Sunak of halving inflation by year-end when inflation was a little above 10% would be fulfilled as consumer spending loses resilience and hiring slows down.
• After UK factory data, investors will shift their focus toward the labor market data for July, which will be released on Tuesday.
• The risk profile seems quiet as investors await the United States Consumer Price Index (CPI) data for July, which will be published at 12:30 GMT.
• On Wednesday, the market mood remained sour after Moody’s downgraded small and mid-sized US banks. The credit-rating firm warned that it could downgrade America’s biggest lenders ahead.
• Analysts at Commerzbank expect the core rate to expand at just 0.2% in July. The headline inflation rate is also likely to be 0.2%. As this would be largely in line with the Federal Reserve (Fed)'s inflation target of 2%, such a result would support the broader view that the central bank is unlikely to raise rates again.
• Annual headline CPI is expected to rebound to 3.3% from 3.0% in the former release due to a modest recovery in gasoline prices. Core inflation is expected to remain sticky at 4.8% YoY.
• The US Dollar Index (DXY) drops after a sluggish performance ahead of the inflation data. July’s inflation data is going to build a base for September’s monetary policy.
• US 30-year mortgage rates rose sharply to 7.09% this week, the second-highest since 2001, demonstrating the impact of the US government downgrade.

Technical Analysis: Pound Sterling maintains auction above 1.2700

Pound Sterling continues to remain well-supported above the round-level support of 1.2700. A power-pack action is anticipated from Cable as the US economy will report its inflation data. The asset continues to trade below the 20 and 50-period Exponential Moving Averages (EMAs), which keeps the short and medium-term trend bearish. A downside move below the four-day low around 1.2680 would elevate the downside pressure.