Pound Sterling demonstrates caution ahead of key central bank policy

• Pound Sterling is exposed to the downside as recession fears remain elevated.
• United Kingdom’s housing sector and factory activities have already come under pressure due to higher borrowing costs.
• Investors seem mixed about the pace at which the BoE will raise interest rates on Thursday.

The Pound Sterling (GBP) looks vulnerable as investors remain cautious ahead of the interest rate decision by the Bank of England (BoE), which will be announced on Thursday. The GBP/USD pair fails to discover strength as a widely anticipated interest-rate hike by the BoE will deepen recession fears. UK Treasury Advisers already warned that an aggressive rate-tightening cycle would dampen the economic outlook.

The BoE has no other alternative than to raise interest rates further as inflationary pressures in the United Kingdom region are four times the desired rate of 2%. The UK’s housing sector and factory activities have already come under pressure due to higher borrowing costs. Firms and households have postponed their credit requirements to avoid higher interest obligations.

Daily Digest Market Movers: Pound Sterling struggles ahead of monetary policy

• Pound Sterling drops further as United Kingdom’s recession fears deepen ahead of Bank of England policy.
• Britain’s inflation is highest among G-7 economies due to labor shortages and elevated food inflation.
• In June, headline inflation in the UK economy softened to 7.9% while the core Consumer Price Index (CPI) that excludes volatile food and oil prices decelerated marginally to 6.8% from its 31-year peak of 7.1%.
• In July, BoE policymakers and UK authorities decided to widen the scope of their inflation-controlling toolkit. UK authorities prodded industry regulators to stop customer overcharging.
• This indicates that UK inflation is higher, therefore, further policy-tightening by the BoE cannot be ruled out.
• Investors seem mixed about the pace at which interest rates will be raised by the BoE policymakers.
• The BoE could tighten the policy consecutively by 50 basis points (bps) to 5.5% and it would be its 14th consecutive interest-rate hike.
• The future of the Pound Sterling is expected to be dark as an aggressive rate-tightening cycle would deepen recession fears swiftly.
• The British economy is showing optimism despite higher interest rates by the BoE. UK lenders approved more mortgages in June than expected and unsecured credit rose by the most in more than five years, Reuters reported.
• UK’s Financial Conduct Authority (FCA) demanded an explanation from commercial banks for not passing the benefit of higher interest rates onto households’ savings. Lawmakers criticized banks for not raising rates on savings at a similar speed at which borrowing rates elevated.
• Meanwhile, the market mood is quiet as investors have been sidelined ahead of the United States factory activities and labor market data.
• The US Dollar Index (DXY) climbs swiftly above 102.00 despite US factory activity looking set to remain in a contraction phase for its ninth month in a row.
• Apart from the US ISM Manufacturing PMI data, investors will focus on ADP Employment data, which will be published on Wednesday.
• Chicago Federal Reserve (Fed) Bank President Austan Goolsbee favors further policy tightening despite easing inflationary pressures.

Technical Analysis: Pound Sterling exposes to 1.2800

Pound Sterling struggles to remain stable above the crucial support of 1.2800. The Cable declines toward the lower portion of the Rising Channel chart pattern formed on a daily time frame. The asset fails to rebound above the 20-day Exponential Moving Average (EMA) and is expected to extend downside to near the 50-day EMA around 1.2750.