- British pound is slightly recover It fared better than its major peers after Britain's ONS reported strong factory data and forecast GDP growth for August.
- Traders expect the Bank of England to cut rates at at least one of its two remaining policy meetings this year.
- Investors are awaiting U.S. PPI data for further clues about the Fed's interest rate outlook.
The British pound (GBP) fell against major currencies in London trading on Friday following the release of UK statistics. Initial reaction to the British currency was positive, but it failed to take advantage of better-than-expected data and gross domestic product (GDP) grew as expected in August.
The Office for National Statistics (ONS) reported that economic growth remained flat in July at 0.2%, as expected. Month-on-month manufacturing and industrial production rose at a solid pace of 1.1% and 0.5%, respectively, while economists had expected growth of 0.2%.
For the year, manufacturing and industrial production contracted by 0.3% and 1.6%, respectively. However, the pace of decline in both economic indicators was slower than in July.
Strong monthly factory data and expected GDP growth have improved the UK economic outlook. This would allow Bank of England (BoE) policymakers to follow a shallow policy easing cycle. Financial market participants expect the BoE to cut interest rates only once in its two remaining policy meetings this year.
Looking ahead, the next trigger for the pound will be the UK jobs report for the three months to August and the Consumer Price Index (CPI) report for September, to be released on Tuesday and Wednesday respectively. Economic data will have a big impact on market expectations for the central bank's interest rate policy in November.
Daily Digest Market Trends: GBP remains weak against US dollar ahead of US PPI
- The British pound fell slightly against the US dollar on Friday. GBP/USD is trading just above the monthly low of 1.3010, but the outlook is cautious as the USD remains strong. The US dollar index (DXY), which tracks the value of the US dollar against six major currencies, remains elevated around 103.00.
- The US dollar is clinging to gains as September's US Consumer Price Index (CPI) data came in better than expected and the Federal Reserve remained within range of cutting interest rates by another 50 basis points (bps) before the end of the year. Off-table meeting in November.
- Thursday's CPI report showed annual core inflation, which excludes volatile food and energy prices, accelerated to 3.3%. Headline inflation rose 2.4%, faster than the 2.3% expected but slower than the preliminary figure of 2.5% in August.
- But traders are confident the Fed will cut rates next month, but at a modest pace of 25 basis points, according to the CME FedWatch tool. Additionally, a majority of Fed policymakers believe further rate cuts are appropriate.
- On Thursday, New York Fed President John Williams said at an event at Binghamton University that “Based on current economic expectations, we expect it to be appropriate to continue the process of shifting our monetary policy stance toward a more neutral one.'' “I am doing so,” he said. Set over time. ”
- On the economic data front, investors will focus on September US Producer Price Index (PPI) data, which will be released at 12:30pm Japan time. The annual headline PPI is estimated to have slowed to 1.6% from 1.7% in August. Conversely, core PPI, which excludes volatile food and energy prices, is expected to accelerate to 2.7% from 2.4% in August.
Technical analysis: GBP remains below 20-day and 50-day EMAs
Sterling is under pressure against the US dollar, near monthly lows of 1.3010. The outlook for the GBP/USD pair is fragile as it remains stable below the upward trendline drawn from the December 28, 2023 high of 1.2827.
The cable’s short-term trend is bearish as it remains below its 20-day and 50-day exponential moving averages (EMAs) trading around 1.3167 and 1.3106, respectively.
The 14-day Relative Strength Index (RSI) drops to near 40.00. Further declines may appear if the momentum oscillator falls below the above-mentioned levels.
Looking to the upside, round-level resistance at 1.3100 and the 20-day EMA near 1.3170 will be major barricades for GBP bulls. On the downside, GBP will find support around the psychological level of 1.3000.
Frequently asked questions about the British pound
Pound Sterling (GBP) is the world's oldest currency (886 AD) and the official currency of the United Kingdom. According to 2022 data, foreign exchange (FX) trade volume is the fourth largest in the world, accounting for 12% of all trades and an average of $630 billion per day. Its main trading pairs are GBP/USD, also known as the “cable”, which accounts for 11% of FX, GBP/JPY (3%), known as the “dragon” among traders, and EUR/GBP (2%) . %). Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the British pound is monetary policy, as determined by the Bank of England. The Bank of England's decision will be based on whether it has achieved its main objective of “price stability,'' or a stable inflation rate of around 2%. The main tool for achieving this is interest rate adjustment. If inflation is too high, the BoE will try to control it by raising interest rates, making credit more costly for people and businesses. This is generally positive for the pound, as rising 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 that economic growth is slowing. In this scenario, the BOE would consider lowering interest rates to make credit cheaper so companies can borrow more to invest in growth-generating projects.
The data release measures the health of the economy and could impact the value of the pound. Indicators such as GDP, manufacturing and services PMI, and employment can all influence the direction of GBP. A strong economy is good for the pound. As well as attracting more overseas investment, that could prompt the BoE to raise interest rates, which could directly lead to a stronger pound. Otherwise, if economic indicators are weak, the pound may weaken.
Another important piece of data about the British pound is its trade balance. This indicator measures the difference between what a country earns from exports and what it spends on imports over a given period of time. If a country produces highly sought-after export goods, its currency will benefit purely from the additional demand generated from foreign buyers looking to purchase these goods. Therefore, if the net trade balance is positive, the currency strengthens, and vice versa if it is negative.
