Pound Sterling remains on backfoot after UK wage report remains soft.
BoE Pill kept doors open for further policy-tightening.
The UK’s consumer inflation report for September is expected to remain soft.
The Pound Sterling (GBP) retreats after soft wage data dampens consumer spending outlook and elevate hopes of continuation of a neutral interest rate decision by the Bank of England (BoE) in its November monetary policy. The GBP/USD pair remains on backfoot as the cascading effects of elevating energy prices could trigger a rebound in inflationary pressures in the United Kingdom economy.
After labor earnings data, investors will focus on the inflation data for September, which will set the undertone of the BoE policy. Inflation in the UK economy is highest in comparison with other G7 economies. Therefore, further softening of consumer inflation would bring some relief for BoE policymakers. Market participants would keep an eye on US President Joe Biden’s visit to Israel about defending themselves against attacks from Palestine.
Daily Digest Market Movers: Pound Sterling falls back after soft wage data
Pound Sterling drops after failing to climb above the round-level resistance of 1.2200 as the United Kingdom wage data remains softer than anticipated.
Three month-to-August Average Earnings excluding bonuses softened to 7.8% as expected from the former release of 7.9%. In the same period, the Average Earnings data including bonuses decelerated to 8.1% from the consensus of 8.3% and the prior release of 8.5%.
Soft wage data would dampen the overall consumer spending.
The UK’s Office for National Statistics (ONS) reported that the publication of employment numbers was postponed by a week to October 24 due to a delay in covering more respondents by the LFS survey.
The ONS reported that the delay would “give us additional time to produce the best possible estimates of the labor market using the best available data sources,” as reported by Reuters.
After wage data, investors will shift their focus on the inflation data for September, which will set the undertone for November monetary policy.
As per the consensus, the core Consumer Price Index (CPI) data is seen softening to 6.0% from 6.2% recorded in August. Monthly headline CPI expanded at a higher pace of 0.4% vs. August reading of 0.3%. The annual data is seen decelerating to 6.5% against former reading of 6.7%.
Investors seem baffled whether the central bank will focus on supporting the economic prospects or return back to the agenda of bringing down inflation to 2%.
A slowdown in progress in inflation returning to 2% could prompt BoE policymakers to look for raising interest rates further by 25 basis points (bps) to 5.50%.
If the BoE manages to raise interest rates by a quarter-to-a-basis points, the policy divergence between the Federal Reserve (Fed) and the BoE would square-off.
On Monday, BoE chief economist, Huw Pill, emphasized on maintaining high interest rates to tame inflation. Pill added that future decisions regarding interest rates would be “finely balanced”, kept doors open for further policy tightening.
The interest rate decision by the BoE for November monetary policy is expected to be impacted by the Israel-Palestine war as supply chain would disrupt and potential cascading effects of rising oil prices could keep headline inflation persistent.
The market mood remains cautious amid deepening Israel-Hamas war as the former is set to carry out ground assault in Gaza. This could result in an intervention of more Middle East players, which could elevate conflicts.
US Secretary of State Anthony Blinken said on Monday that President Joe Biden will visit to Israel to meet Prime Minister Benjamin Netanyahu on Wednesday.
The US Dollar Index (DXY) finds cushion near 106.20 after correcting from weekly high at 106.80 amid cautious market mood.
Meanwhile, investors await the speech from Fed Chair Jerome Powell, which is scheduled for Oct 19 before the Economic Club of New York. Investors would watch for November’s monetary policy framework and the outlook on inflation and the economy.
Technical Analysis: Pound Sterling faces sell-off near 1.2200
Pound Sterling faces selling pressure near 1.2200 after soft wage data. The GBP/USD pair trades inside Monday’s trading range as investors await the UK inflation data. The short-term and broader outlook of the GBP/USD pair is bearish as it is trading below the 20-day Exponential Moving Average (EMA) and the 50 and 200-day EMAs have already delivered a death cross. The Cable could decline towards the psychological support of 1.2000.
Pound Sterling FAQs
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, aka ‘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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