Pound Sterling seeks support as UK’s inflation remains severely persistent

Pound Sterling has found support near 1.2660 as UK PMI numbers remained better than expectations. 
Investors are worried about United Kingdom’s economic prospects as inflation seems stuck above 8.5%.
Financial markets are anticipating that interest rates by the Bank of England would peak around 6.5%.

The Pound Sterling (GBP) has picked bets near 1.2660 as United Kingdom’s global Manufacturing PMI numbers (June) have outperformed expectations. The economic data jumped to 46.5 versus the expectations and the former release of 46.2. The GBP/USD pair broadly looks well-supported as inflationary pressures in the Britain region are struck above 8.5% and showing no signs of easing despite the restrictive monetary policy.

Investors are shifting their focus toward global PMI numbers to asset the impact of interest rates yet elevated to contain stubborn inflation. Manufacturing PMI in the United Kingdom for June is expected to show stability but would remain in contraction.

Daily digest market movers: Pound Sterling seems supported around 1.2700 

Pound Sterling is likely to remain under pressure ahead of the release of the S&P Global Manufacturing PMI data (June). The economic data is seen steady at 46.2. A figure below 50.0 is considered a contraction.
Higher interest rates by the Bank of England (BoE) are weighing pressure on the economic activities in the United Kingdom as firms are saying “no” to fresh credit to avoid higher interest obligations.
BoE policymaker Silvana Tenreyro is opposing further increases in interest rates as risks having to make a sharp U-turn if it tightens policy anymore. She further added that further policy-tightening is already in the pipeline.
Contrary to Tenreyro, BoE Governor Andrew Bailey supported further interest rate hikes as the UK economy is dealing with more persistent inflation.
In the speech at European Central Bank (ECB) forum, Andrew Bailey drew a distinction between how high rates would go, and how long they would need to stay at their peak.
Financial markets are anticipating that the BoE will raise interest rates to 6.25% from the current state of 5%.
The Guardian reported that the UK and other European powers are expected to announce plans to breach the 2015 Iran nuclear deal for the first time when they confirm they are not going to lift sanctions on Tehran’s use of missiles.
Market mood is quiet as investors have sidelined ahead of the quarterly result season.
The US Dollar Index (DXY) has climbed sharply above 103.00 ahead of the United States ISM Manufacturing PMI data.
Manufacturing PMI is seen expanding to 47.2 vs. the former release of 46.9.
Investors should note that US Manufacturing PMI has been contracting straight for the past seven months and is expected to continue its contracting spell due to higher interest rates from the Federal Reserve (Fed).
Fed Chairman Jerome Powell reiterated that more interest rate hikes are appropriate. He further added that the June pause has bought some time for the central bank to assess monetary policy conditions.
Atlanta Fed Bank President Raphael Bostic stated last week that the central bank has reached a point where interest rates are sufficiently restrictive to bring down inflation to 2%.

Technical Analysis: Pound Sterling stabilizes around 1.2660

Pound Sterling is looking to regain the round-level resistance of 1.2700 after a V-shape recovery from 1.2600. The Cable is being supported by the 200-period Exponential Moving Average (EMA), which indicates that the long-term trend is bullish. The asset is broadly trading in a Rising Channel in which each pullback is considered as buying opportunity for the market participants.

Momentum oscillators are showing exhaustion in the upside momentum, however, the upside bias has not faded yet.

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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