The Pound Sterling (GBP) discovered intermediate support as investors started digesting the potential risks of global economic turmoil due to restrictive monetary policy by Western central bankers. The GBP/USD pair finds an intermediate cushion, but the broader bias remains bearish as investors expect that policy divergence between the Federal Reserve (Fed) and the Bank of England (BoE) may not vanish this month.
BoE policymaker Swati Dhingra warned that current monetary policy is “sufficiently restrictive” and that more hikes could hurt the UK economy. The narrative of keeping interest rates steady in coming months got support from BoE Governor Andrew Bailey, who conveyed that the interest rate peak is near. Higher wage growth due to labor shortages has been a driving factor in stubborn UK inflation. Therefore, investors would shift focus to the Employment report for July, which will be published on Tuesday.
Pound Sterling attempts a recovery on Friday after a three-day negative closing spell as investors start digesting fears of global uncertainty. The broader downside of the Cable remains weak as it is struggling to remain above the 200-day Exponential Moving Average (EMA), which is around 1.2500. The 20 and 50-day EMAs have started declining, indicating strength in Cable bears’s determination. Momentum oscillators indicate that the bearish impulse has firmed significantly.
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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