The Pound Falls as the UK Economy Is Seen as Likely to Slow Down

• The Pound Sterling exhibits a reversal in its downward trajectory as the prevailing risk-off sentiment gains momentum in anticipation of the Federal Reserve’s policy decision.
• It is anticipated that the Bank of England (BoE) will maintain its current interest rates without making any adjustments, primarily in response to concerns surrounding the possibility of an economic deceleration.
• The maintenance of a consistent monetary policy decision by the Bank of England will effectively preserve the existing policy divergence between the Bank of England and the Federal Reserve.

The value of the Pound Sterling (GBP) is experiencing a significant decline in response to diminishing investor risk appetite, primarily influenced by escalating tensions in the Middle East, which present potential upward risks. The value of the British Pound has experienced a decline in the United States Dollar, as the latter demonstrates a resurgence in anticipation of the forthcoming interest rate determination by the Federal Reserve (Fed). 

Market participants are eagerly anticipating the forthcoming monetary policy announcement from the esteemed Bank of England (BoE), scheduled to take place on Wednesday. The GBP/USD pair is currently characterized by heightened uncertainty, as it is widely anticipated that the Bank of England (BoE) will maintain the existing interest rates at 5.25%.

This expectation is primarily driven by concerns surrounding the UK economy, grappling with increasingly worrisome indications of a deepening recession. The current state of inflation deviates considerably from the targeted rate of 2%, and there exists a notable risk of enduring price pressures due to the potential escalation of energy prices resulting from the widening conflict in the Middle East.

The Risk-Averse Mentality Contributes to a Decline in the Value of the Pound Sterling Relative to the Dollar

• The Pound Sterling is encountering selling pressure in the vicinity of 1.2200, as the US Dollar exhibits a robust recovery in light of prevailing negative market sentiment.
• The future trajectory of the Pound Sterling is heavily contingent upon the forthcoming monetary policy meeting of the Bank of England.
• The Bank of England has maintained interest rates for the second consecutive time due to sluggish economic performance, subdued household expenditure, tepid labor market conditions, and potential upward pressures on energy costs.
• UK enterprises are presently functioning at reduced capacity due to an unfavorable demand projection, resulting in decreased labor requisition. Expansion plans of various firms have been deferred as a consequence of escalated borrowing costs.
• The decline in consumer spending has been notable, primarily attributed to the substantial increase in price pressures that have exerted considerable strain on households’ real income.
• The UK housing sector is currently being impacted by the implementation of higher interest rates by the Bank of England. According to the latest report from the central bank, mortgage approvals in September reached a total of 43,328, marking the lowest figure observed since the beginning of the year in January.
• The persistent challenges associated with the cost of living crisis and the potential for increased unemployment have compelled households to defer their demand for housing.
• Regarding interest rate guidance, it is anticipated that the Bank of England (BoE) will maintain a receptive stance towards potential future policy tightening, given that headline inflation currently exceeds the desired rate of 2% by a factor of three. Consequently, it is anticipated that the Bank of England (BoE) will maintain interest rates at an elevated level for an extended duration.
• According to statements made by Swati Dhingra, a policymaker at the Bank of England, in October, implementing rate cuts would be seriously considered if the growth rate continues to fall below anticipated levels.
• The prevailing sentiment in the broader market continues to exhibit a pessimistic tone, as the prospects for a ceasefire between Israel and Palestine appear unlikely. The Prime Minister of Israel, Benjamin Netanyahu, has expressed the stance that his government will not entertain the prospect of a cessation of hostilities with Hamas.
• In anticipation of the forthcoming monetary policy meeting conducted by the Federal Reserve, the US Dollar experiences a decline.
• Similar to the Bank of England, the Federal Reserve is anticipated to maintain interest rates within the range of 5.25%-5.50% during its upcoming meeting on Wednesday.
• Positive indicators in the labor market and consumer spending characterize the current state of the US economy. At the same time, the presence of alleviating price pressures contributes to the maintenance of a stable monetary policy. On the contrary, the United Kingdom’s economy is currently grappling with the adverse repercussions stemming from escalated borrowing expenses.
• In the current context, it is worth noting that the escalation of long-term bond yields in the United States has resulted in a constricting effect on financial conditions.
• In addition to the Federal Reserve’s monetary policy, the US Dollar Index (DXY) will be influenced by the forthcoming release of private payrolls and the ISM Manufacturing PMI data for September, scheduled for publication on Wednesday.

Technical Analysis: Sterling Falls to 1.2100

The Pound Sterling is currently experiencing a significant decline in value, particularly in the vicinity of 1.2200, as market sentiment becomes increasingly hostile in response to the escalating conflicts between Israel and Palestine.

The GBP/USD pair continues to exhibit a bearish bias, as indicated by the downward slope of the 20-day and 50-day Exponential Moving Averages (EMAs) relative to the 200-day EMA. The momentum oscillators are currently facing challenges in establishing a stable foundation.