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Pound Sterling turns choppy as investors remain mixed about interest rate peak

Republished By Plato
Republished By Plato

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  • Pound Sterling juggles above 1.2700 after a V-shape recovery inspired by risk-on market mood.
  • UK recession fears deepen as BoE warns about rising corporate default risks.
  • Investors await the Jackson Hole Symposium for further guidance.

The Pound Sterling (GBP) remains directionless after a confident recovery move as bullish market sentiment neutralizes the impact of vulnerable British PMIs reported by S&P Global on Wednesday. The agency reported that factory activities were at their lowest since the pandemic period as firms underutilized their operating capacity due to a bleak demand outlook.

Fears of a recession in the UK economy deepened on Wednesday as warning from Bank of England (BoE) policymakers about significant upside risks to corporate defaults strengthened after the release of vulnerable PMIs. Deepening recession fears are forcing investors to bet on a lower interest rate peak. A poll from Reuters shows that the BoE could pause the rate-tightening spell after an interest rate hike in September.

Daily Digest Market Movers: Pound Sterling consolidates ahead of Jackson Hole Symposium

  • Pound Sterling consolidates above the round-level support of 1.2700 after a V-shape recovery as market sentiment remains bullish.
  • The strength in the Pound Sterling shows that investors are ignoring vulnerable UK preliminary PMI figures for August, reported by S&P Global on Wednesday.
  • S&P Global reported UK Manufacturing PMI dropped significantly to 42.5 from estimates of 45.0 and July’s reading of 45.3. This has been the lowest factory data figure since the pandemic period and demonstrates the consequences of higher interest rates by the Bank of England.
  • Services PMI shifted into the contraction phase below the 50.0 threshold. The economic data landed at 48.7, lower than estimates of 50.8 and July’s release of 51.3.
  • On Tuesday, BoE policymakers warned about significant upside risks to corporate defaults amid higher interest rates. The current tightening cycle by the BoE is aggressive as inflation in the UK is the highest among developed nations.
  • A survey from the BoE shows that the share of non-financial UK companies experiencing a weak debt-service coverage ratio will rise to 50% by year-end from last year’s reading of 45%.
  • Consistently declining factory PMI indicates that UK firms are not operating at full capacity due to a poor economic outlook.
  • Declining PMIs have deepened fears of a recession in the UK economy. This has forced traders to bet on a lower interest rate peak.
  • According to a Reuters poll, the BoE will raise interest rates one more time on September 21 by 25 basis points (bps) to 5.50%. A minority of economists expect rates to go even higher.
  • Significant upside risks to corporate default and vulnerable PMIs are expected to push the UK economy into a recession sooner but BoE policymakers seem helpless and cannot avoid raising interest rates as price pressures are well in excess of the desired rate of 2%.
  • The market sentiment turned bullish after the United States’ preliminary PMI remained weaker than anticipated, indicating that the economy is losing its resilience.
  • The market mood could turn cautious ahead as the Jackson Hole Symposium will start on Thursday. Federal Reserve (Fed) Chair Jerome Powell is expected to provide an outlook on inflation, interest rates, and the economy.
  • The US Dollar Index (DXY) turns sideways around 103.30 after a sell-off move ahead of the Jackson Hole event. Apart from that, investors will keenly focus on the Durable Goods Orders data.
  • Former St. Louis Fed President James Bullard said on Tuesday that the US economy faces novel risks of stronger growth. This could warrant higher interest rates from the central bank to keep up the fight against inflation.

Technical Analysis: Pound Sterling rebounds after a Triple Bottom formation

Pound Sterling consolidates above 1.2700 after a solid recovery move as investors await the Jackson Hole Symposium for further action. The Cable recovered sharply on Wednesday after forming a Triple Bottom chart pattern around 1.2613. For a confident bullish reversal, the asset has to overstep the round-level resistance of 1.2800. The Cable is consistently failing to close above the 20 and 50-day Exponential Moving Averages (EMAs).

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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