The Pound Sterling (GBP) holds onto Thursday’s recovery against its major peers on Friday, although it looks set to post its fourth consecutive week of losses against the US Dollar. Still, the near-term outlook of the British currency appears to have improved on multiple tailwinds: hawkish remarks from Bank of England (BoE) Monetary Policy Committee (MPC) member Catherine Mann, and a continuous expansion in economic activity signaled by the flash United Kingdom (UK) S&P Global/CIPS Purchasing Managers Index (PMI) data for October.
In a panel discussion at the sidelines of International Monetary Fund (IMF) meetings, Catherine Mann – an outspoken hawk – welcomed the soft inflation figures for September but emphasized the need for more slowdown. Despite a decline in the service inflation below 5%, Mann said that inflation in the services sector still has a long way to go in order to be aligned with the bank’s target of 2%.
When asked about her current stance on interest rates, Mann said: "It would be premature to cut rates if you have structural persistence in the relationship between wages and price formation."
Despite Mann’s hawkish comments, traders continue to bet that the BoE will reduce interest rates further in November.
Meanwhile, Thursday’s preliminary PMI report showed that the UK’s business activity expanded in both the manufacturing and the service sectors, albeit at a slower pace compared with September. Even though the overall growth was slower than projected, it was still better than that reported in the United States (US) and the Eurozone, where output in the manufacturing sector continues to contract.
The Pound Sterling trades near 1.2970 against the US Dollar, holding onto Thursday’s rebound after discovering buying interest near the lower boundary of a Rising Channel chart formation around 1.2900 on the daily time frame.
The near-term trend of the Cable is still uncertain as it trades below the 50-day Exponential Moving Average (EMA) at around 1.3070.
The 14-day Relative Strength Index (RSI) remains below 40.00, 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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