Pound Sterling eyes more upside as recession fears recede

Pound Sterling jumps as the UK economy turns out more resilient in June than expected.
Upbeat United Kingdom factory data showcase optimism among producers in spite of a highly-inflated price environment.
Monthly Industrial and Manufacturing Production data grew by 1.8% and 2.4% in June, respectively.

The Pound Sterling (GBP) seems to be grabbing a Currency of the Week tag as the United Kingdom’s factory data for June and the April-June Gross Domestic Product (GDP) grew stronger than expectations. The GBP/USD pair rebounds sharply, defending the sour market sentiment due to outperformance in factory activities.

Upbeat United Kingdom factory data demonstrate optimism among producers in spite of high inflation and tight monetary policy conditions. Stronger-than-expected GDP growth indicates that the economy will manage to avoid recession comfortably. Robust economic growth would allow Bank of England (BoE) policymakers to raise interest rates further. After solid GDP growth, investors will shift their focus to the labor market data, which will be published on Tuesday at 06:00 GMT.

Daily Digest Market Movers: Pound Sterling rebounds on outperforming UK GDP

Pound Sterling rises strongly as Q2 GDP data outperforms market expectations.
Monthly GDP came out of contraction and grew by 0.5% vs. expectations of 0.2% growth. In the January-March quarter, the growth rate contracted by 0.1%.
Quarterly GDP grew by 0.2% while analysts had forecasted a stagnant performance. The annual growth rate was 0.4%, doubled the consensus and the prior release of 0.2%.
Monthly Industrial Production for June expanded strongly by 1.8% against the estimates for 0.1% growth. In May, the economic data contracted by 0.6%. Annual data rose significantly to 3.1%.
Also, Manufacturing Production grew strongly by 2.4% against 0.2% as forecasted on a monthly basis.
No doubt, UK factory data beat estimates by a wide margin and demonstrates fresh optimism among producers despite aggressively tight interest rate policy by the Bank of England.
Stronger-than-expected UK growth rate indicates that the economy could manage to avoid recession this year.
The reasoning behind sheer optimism among producers seems to be easing inflationary pressures and resilient consumer spending.
Upbeat factory data would comfort BoE policymakers and allow them to raise interest rates further so that core inflation could return to a 2% rate quickly as fears of recession recede sharply.
The BoE has already raised interest rates to 5.25% and further policy tightening is widely anticipated.
Market mood dampens as investors remain worried that China could retaliate against a ban on US investment in specific hi-tech Chinese industries.
The US Dollar Index (DXY) turns sideways around 102.50 after a solid recovery as the United States Consumer Price Index (CPI) rose moderately in July due to rising house rentals and a minor recovery in gasoline prices.
US inflation advances at a 0.2% pace in July, in line with the Federal Reserve’s (Fed) desired rate of 2% core inflation growth. This would allow the Fed to maintain interest rates steadily and provide a comma to its aggressive rate-tightening spell.
US inflation looks good on its softening path along with a historically low Unemployment Rate, which would allow the economy to avoid a recession.
On Friday, investors will keep an eye on the July Producer Price Index (PPI) data, which will be published at 12:30 GMT.
Meanwhile, San Francisco Fed Bank President Mary Daly joins Philadelphia Fed Bank President Patrick Harker and New York Fed President John Williams, saying that the central bank could discuss rate cuts next year but is largely dependent on the economy and inflation.

Technical Analysis: Pound Sterling climbs above 1.2700

Pound Sterling rebounds sharply above the round-level resistance of 1.2700 after remaining sideways around 1.2680 following UK factory data that beat expectations. The Cable comes out of the fire but is still in the frying pan as it trades below the 20 and 50-day Exponential Moving Averages (EMAs). On Thursday, the asset attempted to climb above the 20-day EMA but faced an intense sell-off and turned vulnerable. The major fail to return to the Rising Channel chart pattern after a breakdown formed on the daily chart.

GDP FAQs

A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022.
Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.

A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency.
When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.

When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.

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