Pound Sterling revives as BoE Mann supports aggressive tightening

10 Oct 2023, 16:06 · Views 50

Pound Sterling capitalizes on improved market sentiment and BoE’s Mann hawkish commentary.
Katherine Mann favored an aggressive policy-tightening approach.
Investors shift focus to the UK August GDP data scheduled for Thursday.

The Pound Sterling (GBP) stabilizes after recovering from a six-month low as market sentiment improves and Bank of England (BoE) policymaker Katherine Mann calls for a more aggressive approach to bring down inflation to 2%. Last week, BoE Governor Andrew Bailey said he expected inflation to decline to or below 5% by year-end, but added that he doesn’t promise the achievement of price stability in a timely manner.

The UK manufacturing and construction sectors are bearing the brunt of higher interest rates. UK’s factory activity has been contracting, with the PMI gauge coming in below the 50.0 threshold for a long period. To get more insights about the current status of the economy, investors will shift focus to the UK factory activity and GDP data for August, which will be released on Thursday.

Daily Digest Market Movers: Pound Sterling recovers as US Dollar corrects

Pound Sterling faces some selling pressure near 1.2250 against the US Dollar, but more upside seems favored as Bank of England policymakers supported more aggressive monetary policy.
BoE’s Katherine Mann, who has been a hawkish policymaker, said on Monday that central bankers need to be more aggressive. The central bank is not solely responsible for bringing down inflation to 2% but also needs to tame rising inflation expectations, she said.
Katherine Mann expressed concerns about how long inflation will remain above the desired target of 2%.
UK inflation is higher compared with other G7 economies. Rising Oil prices due to deepening Middle East tensions could prompt higher inflation expectations.
Due to higher inflation and interest rates by the BoE, the UK economy is going through a vulnerable phase. UK manufacturing output and construction spending have both declined as firms are worried about the demand outlook.
Investors will focus on the August GDP report, which will be published on Thursday, which will provide further clues about the country’s economic performance. Economists expect monthly Manufacturing Production contract by 0.4% against a 0.8% contraction recorded for July. Monthly Industrial Production is foreseen to decline at a slower pace of 0.2% against a contraction of 0.7% in July.
The continued decline in UK factory activity would indicate that firms are still pessimist about forward demand despite a pause in the policy-tightening spell by the BoE.
The monthly Gross Domestic Product (GDP) is seen expanding by 0.2%, swinging from a 0.5% decline recorded in July.
On the global front, investors seem to be digesting the Israel-Hamas war as the latter said it is open to discussions over a truce. Still, talks about a ceasefire aren’t expected soon and the is an increasing risk of participation from other countries in the conflict. .
The US Dollar Index (DXY) found some support after testing the crucial level of 106.00. Investors shift focus to the United States inflation data, which will be published on Thursday. The core Consumer Price Index (CPI), which excludes volatile food and Oil prices, is seen expanding at a steady pace of 0.3% on month.
The USD Index could strengthen if the inflation report for September turns out hotter than expected. Sticky inflation and robust labor market conditions could force Federal Reserve (Fed) policymakers to opt for another interest rate hike on November 1.
Before that, the FOMC minutes from the last Fed meeting will be keenly watched, which will be released on Wednesday. The FOMC minutes for September monetary policy will likely provide the rationale behind keeping interest rates unchanged.

Technical Analysis: Pound Sterling struggles to climb above 1.2250

Pound Sterling faces barricades near its weekly high at 1.2250, but the pair is expected to extend its upside momentum as the risk-appetite of market participants is improving. The GBP/USD pair has rebounded to near the 20-day Exponential Moving Average (EMA) at around 1.2264. However, the broader GBP/USD outlook is bearish as the 50-day and 200-day Exponential Moving Averages (EMAs) have delivered a death cross near 1.2450. Potential support is around 1.2000.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

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 the Pound Sterling because 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 economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

What is Quantitative Easing (QE) and how does it affect 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 stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

What is Quantitative tightening (QT) and how does it affect the Pound Sterling?

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

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