•  Pound Sterling experiences a sell-off after mixed UK factory data.
• The UK economy is expected to report a technical recession despite 0.3% growth in November GDP.
• Investors await the US PPI, UK labor market and inflation data for further action.

The Pound Sterling (GBP) faces a correction after the United Kingdom Office for National Statistics (ONS) reported mixed factory data for November. Monthly growth in the manufacturing sector was slightly higher while annual data failed to match expectations. Overall economic data was slightly better than expectations but seems incapable of taming fears of a technical recession happening in the UK economy.

Going forward, the Pound Sterling will be guided by the labor market and inflation data, which are due to be released next week. Cooling labor market conditions and a further decline in price pressures will deepen hopes of a dovish interest rate outlook from the Bank of England (BoE) in its first monetary policy announcement of 2024 on February 01.

Meanwhile, near-term demand for the Pound Sterling is upbeat due to improved market sentiment. The GBP/USD pair remains in the bullish trajectory as chances of an interest rate cut from the Federal Reserve (Fed) remain firm despite a sticky United States Consumer Price Index (CPI) report for December.

Daily Digest Market Movers: Pound Sterling drops while US Dollar recovers further

• Pound Sterling has surrendered intraday gains after the United Kingdom ONS reported mixed factory data for November.
• Monthly Manufacturing Production rose by 0.4% against expectations of 0.3% – in October it contracted by 1.2%. On an annual basis, the economic data gained at a slower pace of 1.3% against expectations of 1.7% but significantly outperformed the former reading of 0.2%.
• Monthly Industrial Production was up by 0.3% as expected against a contraction of 1.3% in October. The annual factory data surprisingly shrank by 0.1% while investors projected a significant growth of 0.7%. Previously the data point showed a contraction of 0.5%.
• Monthly GDP grew slightly higher by 0.3% against the estimates of 0.2%. The UK economy shrank by 0.3% in October.
• The economic data is insufficient to give confidence among market participants that the UK economy will dodge a technical recession in the final quarter of 2023.
• It will be tough for Bank of England (BoE) policymakers to make choices between higher price pressures and vulnerable economic outlook.
• While no discussions have come from BoE policymakers about rate cuts, investors see the central bank lowering borrowing costs this year to avoid ‘over-tightening’ consequences.
• Next week, action in the Pound Sterling will be guided by the labor market for November and inflation data for December, which will set an undertone for February’s monetary policy meeting.
• UK labor market conditions are cooling swiftly as employers posted 32% less job vacancies in December from a year ago. The Recruitment and Employment Confederation (REC) department said that permanent jobs have declined all over 2023.
• The demand for risk-perceived assets is upbeat while the US Dollar Index (DXY) has fallen back to its crucial support of 102.30.
• The USD Index fails to capitalize on stubbornly high inflation data as bets in favour of a rate cut from the Federal Reserve (Fed) remain firm.
• Gains generated after the release of the inflation by the USD Index were surrendered as core inflation continues to soften while headline inflation rose sharply and Fed policymakers generally consider the core CPI data for decision-making.
• In today’s session, the USD Index will see an action after the release of the United States Producer Price Index (PPI) data for December, which will be published at 13:30 GMT.

Technical Analysis: Pound Sterling drops from 1.2800

Pound Sterling faces pressure from two-week high around 1.2790 after the release of UK factory data. The broader appeal for the GBP/USD pair is upbeat as 20 and 50-day Exponential Moving Averages (EMAs) are sloping higher. The Cable aims to sustain above the 61.8% Fibonacci retracement at 1.2710 (of the move from 13 July 2023 high at 1.3142 to 4 October 2023 low at 1.2037).

The 14-period Relative Strength Index (RSI) attempts to break above 60.00. A bullish momentum would trigger if the RSI (14) manages to do so.

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.