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Pound Sterling picks finds significant offers as risk profile turns cautious


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  • Pound Sterling has extended its correction to near 1.2900 amid cautious market mood.
  • United Kingdom firms are offering higher payroll charges to offset labor shortages.
  • Britain’s jobless rate has jumped to 4% and the Claimant Count Change has added fresh 25.7K job seekers.

The Pound Sterling (GBP) has dropped after printing a fresh 15-month high around 1.2970 as the risk profile has turned cautious ahead of infation data. The GBP/USD pair has picked immense strength as chances of a bulky interest rate hike from the Bank of England (BoE) have escalated, knowing the fact, that higher disposable income available to households will result in higher purchasing power, and eventually the overall demand will elevate further.

United Kingdom firms are offering higher wages to attract fresh talent amid labor shortages. Scrutiny of the Employment data indicates that the jobless rate has increased as firms have started avoiding credit due to higher interest rate attachment. It seems that the chances of a fat rate hike by the BoE will remain elevated as higher wage pressures are sufficient to offset the impact of a rise in the Unemployment Rate.

Daily Digest Market Movers: Pound Sterling faces pressure ahead of inflation data

  • Pound Sterling auctions comfortably above 1.2900 United Kingdom labor cost has turned out hotter than expected.
  • Three-month Average Earnings excluding bonuses have remained steady at 7.3% while investors were anticipating a decline to 7.1%.
  • Claimant Count Change has jumped to 25.7K while there was a decline of 22.5K claims last month. Three-month Unemployment Rate has increased to 4.0% vs. the expectations and the former release of 3.8%.
  • Higher wage pressures are sufficient to offset a significant rise in the jobless rate.
  • Market participants are expecting that the interest rates by the Bank of England would peak at 6.25-6.50%.
  • BoE Governor Andrew Bailey conveyed on Monday that the central bank will keep the job market under observation in an attempt to bring down inflation.
  • Andrew Bailey reiterated that the central bank is making efforts to provide an environment of price stability.
  • United Kingdom FM Jeremy Hunt cited on Monday that the government and the central bank “will do what is necessary, for as long as necessary” to return inflation to its 2% target.
  • Inflation in Britain’s economy has softened from its peak of 11.1%, however, the promise made by UK PM Rishi Sunak that inflationary pressures would halve by year-end would be missed.
  • A survey from British Retail Consortium (BRC) showed that higher food prices have squeezed the budgets of households, which has eased demand for big-ticket items.
  • Households are facing the burden of high price pressures as the pace of inflation is higher than the velocity of labor costs.
  • Last week, Andrew Bailey urged industry regulators to stop overcharging customers for fuel.
  • This week, UK’s economic calendar is full of events as the labor market data will be followed by Wednesday’s Financial Policy Committee (FPC) minutes, and Thursday’s Industrial and Manufacturing data (May).
  • Monthly Industrial Production and Gross Domestic Product (GDP) are expected to contract by 0.4%. And Manufacturing Production is seen contracting by 0.5%.
  • Market sentiment is quite bullish amid an upbeat appeal for risk-sensitive currencies.
  • The US Dollar Index (DXY) has extended its four-day losing spell as investors are hoping only one interest rate hike has left in the toolkit of the Federal Reserve (Fed).
  • Cleveland Fed President Loretta Mester, in a speech at the University of San Diego, cited that “The economy has shown more underlying strength than anticipated earlier this year, and inflation has remained stubbornly high, with progress on core inflation stalling,” as reported by Reuters.
  • This week, the United States Consumer Price Index (CPI) will be keenly watched. As per the preliminary report, monthly headline CPI delivered a higher pace of 0.3% vs. the former pace of 0.1%. Also, core inflation that excludes oil and food prices is expected to match the headline CPI pace.

Technical Analysis: Pound Sterling extends correction to 1.2900

Pound Sterling has continued its four-day winning streak after overstepping Monday’s high at 1.2868. The Cable is approaching the Rising Channel chart pattern formed on a daily period in which each pullback is considered a buying opportunity for investors. Upward-sloping 50-and 200-period daily Exponential Moving Averages (DEMAs) indicate that the overall trend is extremely bullish. Bounded oscillators are demonstrating strength in the upside momentum. 

BoE FAQs

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).

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.

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.

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.