Pound Sterling capitalizes on improved market mood, S&P PMI in focus

• Pound Sterling strengthens as more interest rate hikes from the BoE are warranted for the achievement of price stability.
• The UK housing sector faces the wrath of higher mortgage rates.
• Rishi Sunak plans for cabinet reshuffle sooner ahead of general elections.

The Pound Sterling (GBP) prints a fresh three-day high, capitalizing on improving market sentiment and expectations of more interest rate hikes from the Bank of England (BoE) to ensure price stability. The GBP/USD pair picks strength as investors hope that the current tightening cycle of the BoE will surpass the tightening peak by the Federal Reserve (Fed).

Higher borrowing cost by the BoE widens its scope of consequences to the United Kingdom’s property sector. Homebuyers have been witnessing an affordability squeeze due to higher mortgage rates as strong wage growth struggles to offset higher installment obligations. The Pound Sterling is expected to remain in action as UK PM Rishi Sunak is planning a big cabinet reshuffle ahead of general elections in 2024.

Daily Digest Market Movers: Pound Sterling rebounds amid a risk-on market mood

• Pound Sterling approaches a three-day high near 1.2800 as investors’ risk appetite improves ahead of preliminary PMIs data for August.
• UK’s S&P Global PMI data will be released on Wednesday at 08:30 GMT. Manufacturing PMI is seen declining to 45.0 vs. the former reading of 45.3. Services PMI is expected to remain steady at 52.3.
• After July’s economic data, investors hope that the Bank of England cannot pause its rate-tightening cycle so that inflation returns to 2%.
• Strong wage growth allows households to spend heavily and core inflation to remain stubborn. UK core inflation remains steady at 6.9%, marginally lower from its peak of 7.1%.
• Headline inflation softened sharply to 6.8% from June’s figure of 7.9%. Fuel sellers stopped overcharging consumers after being warned by BoE Governor Andrew Bailey.
• Meanwhile, Fitch said that energy and food inflation in the UK are likely to fall further in the coming months due to base effects.
• Considering the current inflation situation, UK PM Rishi Sunak may not fulfill his promise of halving inflation to 5% by the year-end.
• The BoE is expected to raise interest rates further in September and the interest rate peak is forecast at 5.75%.
• The consequences of 14 back-to-back interest rate hikes by the UK central bank have slowed consumer spending momentum. Retail Sales dropped in July due to wet weather as high inflation has squeezed the real income of households.
• The impact of restrictive monetary policy has widened to the entire property sector. Major mortgage lender Halifax showed that home affordability has shrunk significantly as stronger wage growth fails to offset higher borrowing costs.
• Discussions about UK’s cabinet reshuffle remained hot this weekend. Reuters reported that PM Sunak is now considering focusing on replacing ministers who have already said they want to step down, such as former Defence Secretary Ben Wallace.
• UK cabinet reshuffle is expected to happen sooner as Rishi Sunak is failing to fulfill his promise of halving inflation and strengthening economic prospects ahead of general elections scheduled for 2024.
• The US Dollar Index (DXY) remains sideways above 103.00 as investors prepare for the Jackson Hole Economic Symposium, which will start on Thursday.
• Investors hope that Fed chair Jerome Powell may not discuss hiking interest rates without any compelling economic data but will deliver a strong message of achieving price stability by keeping interest rates higher for longer.
• The upside momentum in US Treasury yields has slowed down as Jerome Powell is likely to discuss keeping interest rates neutral at the September policy meeting.
• Moody’s, S&P Global have downgraded the credit ratings of US commercial banks, citing risks of rising outflows in a high-interest rate environment.

Technical Analysis: Pound Sterling refreshes three-day high

Pound Sterling prints a fresh three-day high around 1.2800, increasing gradually due to a subdued US Dollar. The Cable has been trading in a range of 1.200-1.2800 for the past three weeks, and an explosion of the same will result in wider ticks and heavy volume. On a daily time frame, the asset has managed to climb above the 20 and 50-day Exponential Moving Averages (EMAs), which indicates that the mid-term trend has turned bullish.