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Pound Sterling meets fresh offers, upside still favored as BoE to raise rates further


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  • Pound Sterling struggles to extend recovery despite a cheerful market mood.
  • More interest rates by the Bank of England will elevate pressure on United Kingdom’s economic growth.
  • UK first-time home buyers postpone demand as the housing sector faces headwinds from higher borrowing rates.

The Pound Sterling (GBP) discovers novel offers after printing a fresh four-day high as market participants shrug off risk associated with weak economic prospects. The GBP/USD pair recovers sharply as strength in Pound Sterling is uncovered ahead of the interest rate decision by the Bank of England (BoE), which will be announced on August 3.

No doubt, higher interest rates by the United Kingdom’s central bank have already dampened economic growth. The BoE cannot avoid raising rates further as inflation is almost four times the required rate of 2%. An interest rate hike at the August policy meeting would be the 14th straight raise to build pressure on stubborn inflation. The UK central bank is expected to raise interest rates by 25 basis points (bps) to 5.25%.

Daily Digest Market Movers: Pound Sterling looks solid ahead of key central bank policy

  • Pound Sterling finds resistance near the round-level resistance of 1.2900 after a sharp recovery as investors turn cautious ahead of key interest rate policy.
  • Market sentiment for Pound Sterling turns upbeat as investors ignore the United Kingdom’s weak economic prospects.
  • UK households are facing pressure from stubborn inflation and higher interest rates by the Bank of England as demand for big-ticket items hit hard.
  • The housing sector faces the headwinds of higher borrowing costs as first-time buyers postpone home purchases.
  • Britain’s economic recovery is under stress as a one-time decline in inflation is insufficient to increase confidence among individuals.
  • More interest-rate hikes from the BoE are in the pipeline as the journey toward achieving price stability is still out of sight.
  • Meanwhile, the BoE is preparing for its 14th consecutive interest-rate hike, which will be announced on August 3.
  • Investors hope that interest rates by the UK central bank will peak around 5.75%, according to a Reuters poll.
  • BoE policymakers need to do a lot more so that UK PM Rishi Sunak can meet his promise of halving inflation to 5% by year-end.
  • The Confederation of British Industry reported on Monday that British factory orders declined in July at the weakest rate this year, a positive sign, while expectations for increases in selling prices cooled further, according to Reuters.
  • Meanwhile, the US Dollar Index (DXY) has extended its correction below 101.20 as investors are clear that the Federal Reserve (Fed) will raise interest rates to 5.25-5.50%.
  • Investors are uncertain whether the Fed will consider a further interest rate hike in September or will skip the tightening regime as it did at June’s meeting.
  • The context of easing inflation in the United States while keeping the Unemployment Rate at record lows has put the Fed in a more comfortable situation.
  • Also, resilience in the US economy due to tight labor market conditions and decent consumer spending eased fears of recession.

Technical Analysis: Pound Sterling aims to sustain above 1.2900

Pound Sterling discovers buying interest after an intense sell-off to near the round-level cushion of 1.2800. The Cable finds support after successfully testing the 20-day Exponential Moving Average (EMA) around 1.2866. The asset prints a four-day high marginally above 1.2900 and is expected to continue its upside momentum. The Cable trades above short-to-long-term EMAs, indicating firm upside bias.

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.