The Pound Sterling (GBP) trades sideways against its major peers in Thursday’s London session as investors await the preliminary United Kingdom (UK) S&P Global/CIPS Purchasing Managers Index (PMI) data for October, which will be published at 08:30 GMT.
The PMI report is expected to show that overall business activity expanded at a moderate pace. Activities in the manufacturing sector are estimated to have increased but at a slower pace to 51.4 from 51.5 in September. In the same period, the Service PMI is expected to have grown to 52.2 but lower than the former release of 52.4. Signs of continuous expansion in the economic activity will indicate a robust economic outlook.
The outlook of the Pound Sterling is expected to remain volatile as Bank of England (BoE) Governor Andrew Bailey remained confident about inflation decelerating faster than expected. “Disinflation is happening, I think, faster than we expected it to, but we still have genuine question marks about whether there have been some structural changes in the economy,” Bailey said during the Institute of International Finance event, Bloomberg reported.
The comments from Bailey have prompted BoE’s dovish bets. According to market speculation, traders expect the BoE to cut interest rates in November and are heavily confident about repeating the move in December.
In today’s session, BoE Monetary Policy Committee (MPC) member Catherine Mann is scheduled to speak at 13:00 GMT. Mann, an outspoken hawkish, was among four MPC members who voted to leave interest rates unchanged in August, the only time the BoE cut its key borrowing rates this year. At 19:45 GMT, Governor Bailey will deliver the Mike Gill Memorial Lecture at the US Commodity Futures Trading Commission (CFTC).
The Pound Sterling is at make or a break near the lower boundary of a Rising Channel chart formation on the daily timeframe. The GBP/USD pair could face sharp selling pressure if it fails to hold the same.
The near-term trend of the Cable has worsened further as it has broken below the 100-day Exponential Moving Average (EMA), which trades around 1.2990.
The 14-day Relative Strength Index (RSI) slides to near 35.00, signals an active bearish momentum.
Looking down, the 200-day EMA near 1.2845 will be a major support zone for Pound Sterling bulls. On the upside, the Cable will face resistance near the psychological figure of 1.3000 and the 20-day EMA around 1.3060.
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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