- Sterling sells off after mixed UK factory data.
- The British economy is expected to report a technical recession despite 0.3% GDP growth in November.
- Investors await US PPI and UK labor market and inflation data.
The British Pound (GBP) is facing a correction after the UK Office for National Statistics (ONS) reported mixed factory data for the month of November. Monthly growth in the manufacturing sector was slightly higher, while annual data fell short of expectations. Overall, the economic data was slightly better than expected, but seemed unable to allay fears of a technical recession in the British economy.
Looking ahead, the British pound will be guided by labor market and inflation data, due to be released next week. A cooling labor market and a further easing of price pressure will bolster hopes that the Bank of England (BoE) will be dovish on the interest rate outlook in its first monetary policy announcement of 2024, the February 1st.
Meanwhile, short-term demand for the British Pound is optimistic due to improving market sentiment. The GBP/USD pair remains on a bullish trajectory as the odds of an interest rate cut by the Federal Reserve (Fed) remain firm despite the Consumer Price Index (CPI) December US reported persistent inflation.
Daily Market Summary: Pound Retreats, Dollar Continues to Recover
- The British Pound lost ground intraday after the UK's Office for National Statistics (ONS) reported mixed production data for the month of November.
- Monthly manufacturing production rose 0.4%, compared to expectations of 0.3%; in October it contracted 1.2%. On a year-over-year basis, economic data rose at a slower pace of 1.3% versus expectations of 1.7%, but significantly exceeded the previous reading of 0.2%.
- Monthly industrial production rose 0.3%, as expected, compared with a 1.3% contraction in October. Annual factory data surprisingly contracted by 0.1%, while investors were expecting significant growth of 0.7%. Previously, the data showed a contraction of 0.5%.
- Monthly GDP grew slightly by 0.3% compared to estimates of 0.2%. The British economy contracted 0.3% in October.
- Economic data is insufficient to give market participants confidence that the British economy will avoid a technical recession in the final quarter of 2023.
- It will be difficult for policymakers at the Bank of England (BoE) to choose between increased price pressure and a vulnerable economic outlook.
- Although BoE policymakers have not talked about rate cuts, investors believe the central bank will reduce borrowing costs this year to avoid the consequences of “excessive tightening.”
- Next week, sterling action will be guided by November labor market data and December inflation data, which will set the tone for the February monetary policy meeting.
- British labor market conditions are cooling rapidly, with employers posting 32% fewer job offers in December than a year ago. According to the department of the Recruitment and Employment Confederation (REC), permanent jobs have decreased throughout 2023.
- Demand for risk assets is bullish, while the US Dollar Index DXY has retreated to its crucial support of 102.30.
- The DXY Dollar Index fails to capitalize on inflation data, which remains elevated, as expectations for a rate cut by the Federal Reserve (Fed) remain firm.
- Post-DXY inflation gains surrendered as core inflation continues to soften while headline inflation rose sharply and Fed policymakers generally factor in core CPI data for decision-making .
- In today's session, the DXY index will see some action after the release of US Producer Price Index (PPI) data for December, which will be released at 13:30 GMT.
Technical Analysis: British Pound falls from 1.2800
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The British Pound faces pressure from two-week highs around 1.2790 against the US Dollar following the release of UK factory data. The GBP/USD pair is bullish as the 20-day and 50-day EMA are tilted higher. The pair aims to stay above the 61.8% Fibonacci retracement at 1.2710 (moving from the July 13, 2023 high at 1.3142 to the October 4, 2023 low at 1.2037).
The 14-period Relative Strength Index (RSI) attempts to break above 60.
Pound Sterling FAQ
What is the Pound Sterling?
The British Pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded currency unit in the world, with 12% of all transactions and an average of $630 billion per day, according to 2022 data.
Its key currency pairs are GBP/USD, also known as “Cable”, which represents 11% of the forex market, GBP/JPY, or the “Dragon” as it is known to traders (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
How do Bank of England decisions influence the Pound Sterling?
The most important factor influencing the value of the Pound Sterling is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on achieving its main objective of “price stability”, that is, a stable inflation rate of around 2%. Its main tool to achieve this is the adjustment of interest rates.
When inflation is too high, the Bank of England tries to contain it by raising interest rates, which makes access to credit more expensive for individuals and companies. This tends to be positive for the GBP, as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation is too low, it is a sign that economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to make credit cheaper, so that companies borrow more to invest in projects that generate growth.
How does economic data influence the value of the Pound?
The published data gauges the health of the economy and may influence the value of the Pound sterling. Indicators such as GDP, manufacturing and services PMIs, and employment can influence the direction of the Pound.
A strong economy is good for the British pound. Not only does it attract more foreign investment, but it may encourage the Bank of England to raise interest rates, which will directly strengthen the Pound. Otherwise, if economic data is weak, the pound is likely to fall.
How does the trade balance affect the Pound?
Another significant data 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 during a given period.
If a country produces highly sought-after exports, its currency will benefit exclusively from the additional demand created by foreign buyers wishing to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
