Home Forex Sterling recovers three-week high as soft US data boosts market sentiment

Sterling recovers three-week high as soft US data boosts market sentiment

by SuperiorInvest


  • Sterling is recovering sharply thanks to the upbeat mood in the market.
  • The BoE keeps interest rates steady to protect the economy from recession.
  • Britain’s Rishi Sunak is expected to deliver on his promise to halve inflation to 5.4% by the end of the year.

The pound sterling (GBP) is moving fast as it improves market sentiment overcomes stagnant growth view for the UK economy. Market sentiment improved significantly after the event United States Job demand slowed in October and the unemployment rate rose more than expected.

Short-term demand for the GBP/USD pair depends on the performance of the UK economy in the fourth quarter of 2023. However, the latest information on the UK economy suggests that the manufacturing sector continued to contract in October due to higher borrowing costs and the cost of living. This created a negative tone for the growth rate in the October-December period.

S&P Global reported that the services PMI improved to 49.5, compared with expectations of 49.2 and September’s reading of 49.3, but remained below 50.0 for the third month in a row. The agency said new orders were the lowest since November 2022 as high consumer inflation stretched household budgets.

The Bank of England (BoE) left interest rates unchanged at 5.25% for the second time in a row on Thursday so as not to trample on the limited growth that exists. There are signs that the economy is barely avoiding recession. Business optimism fell to a ten-month low, forcing employers to cut wages, purchases and inventories significantly. As for the inflation outlook, BoE Governor Andrew Bailey appears confident that the central bank can reduce inflation to 2% within two years.

Daily Digest Market Movers: Sterling gains on falling US dollar

  • Sterling climbed to near 1.2300 as softer-than-expected jobs data boosted market participants’ risk appetite.
  • Upbeat market sentiment pulled the US dollar index (DXY) vertically. According to the US NFP report, employers hired 150,000 jobseekers in October, which was less than the 180,000 expected and the downwardly revised figure of 297,000 in September. The US unemployment rate rose to 3.9%.
  • The GBP/USD pair took the Bank of England (BoE) steady interest rate decision positively on Thursday and moved higher to 1.2220.
  • BoE policymakers: Megan Greene, Jonathan Haskel and Katherine Mann voted to raise rates by 25 basis points (bps), while the other six policymakers favored keeping the status quo.
  • Sterling’s gains remained limited as the BoE’s decision to keep interest rates unchanged at 5.25% was taken largely on fears that the economy could slip into recession.
  • Growth rates are expected to remain stagnant in future quarters due to tensions in the Middle East, deteriorating labor demand, a weak demand outlook, weak consumer spending and a poor housing market.
  • S&P Global reported that the decline in UK manufacturing continued at the start of the final quarter of the year, meaning the factory sector remains a drag on an economy that has already weathered recession.
  • BoE governor Andrew Bailey warned over interest rates that the central bank would keep interest rates elevated long enough to push excessive price pressures above the 2% inflation target.
  • Andrew Bailey left the door open to further policy tightening and ruled out hopes of a rate cut in the near future as inflation in the UK economy is the highest among the G7 economies.
  • The BoE’s inflation forecast expected headline inflation to ease to 4.6% by Q4 2023. Inflation over the one to two year horizon should ease to 3.1% and 1.9%.
  • The central bank’s fresh inflation projections suggest British Prime Minister Rishi Sunak will make good on his pledge to halve inflation to 5.4% by the end of the year.
  • Meanwhile, deepening Middle East tensions are keeping global economies on edge. The Israeli army has confirmed that its troops have encircled Gaza and a ceasefire is not at all likely.
  • US Secretary of State Anthony Blinken arrived in Israel for talks on suspending the ground invasion of the Israel Defense Forces (IDF) in order to ensure the dispatch of humanitarian aid and take concrete steps to protect hostages.

Technical Analysis: Sterling climbed above 1.2300

Sterling jumped vertically above round resistance at 1.2300 on improving market sentiment. The GBP/USD pair tried to break the symmetric triangle formation on the daily time frame, which will lead to an expansion of volatility. The Cable is attempting to stabilize above the 20-day exponential moving average (EMA) at 1.2186. If the GBP/USD pair succeeds, short-term demand for sterling is likely to turn positive.

Frequently asked questions about the BoE

The Bank of England (BoE) decides the UK’s monetary policy. Its primary objective is to achieve “price stability”, or a stable inflation rate of 2%. Its tool to achieve this goal is the adjustment of base interest rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, thereby determining the overall level of interest rates in the economy. This also affects the value of the pound sterling (GBP).

When inflation is above the Bank of England’s target, it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for sterling as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign of slowing economic growth and the BoE will consider cutting interest rates to make borrowing cheaper in the hope that businesses will borrow to invest in growth-creating projects – which is negative for the pound.

In extreme situations, the Bank of England can enact a policy called quantitative easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a troubled financial system. QE is a policy of last resort when interest rate cuts do not achieve the desired result. The QE process involves the BoE printing money to buy assets ā€“ usually AAA-rated government or corporate bonds ā€“ from banks and other financial institutions. QE usually leads to a weaker pound sterling.

Quantitative tightening (QT) is the opposite of QE, which occurs when the economy strengthens and inflation begins to rise. While in QE the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage them to lend; at QT, the BoE will stop buying more bonds and stop reinvesting the principal due in the bonds it already holds. It is usually positive for the pound sterling.

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