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The Pound Is Under Pressure From Persistent Inflation and Economic Problems

Leon Kramer

ByLeon Kramer

Sep 30, 2023

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  • The Pound Sterling has experienced a notable increase, reaching a level of 1.2200, attributed to an improvement in the risk appetite among market participants.
  • The United Kingdom’s economy is anticipated to persist in grappling with the adverse effects of elevated inflation and decelerating demand.
  • The potential emergence of stagflation risks in the UK economy may be attributed to high inflation and a deceleration in labor demand.

The Pound Sterling (GBP) experienced a resurgence, approaching the 1.2200 level, following identifying a support level near 1.2100. This recovery was prompted by a modest correction in the US Dollar, which enhanced the attractiveness of assets associated with higher risk tolerance.

Previously, the GBP/USD pair experienced a decline in value as investors tended to divest from investments perceived as risky, owing to a prevailing sense of caution within the market. The outlook for the GBP/USD currency pair continues to exhibit vulnerability, primarily driven by heightened risks of an economic recession within the United Kingdom.

These risks have been amplified by the current state of the nation’s economic prospects, characterized by a sense of fragility. The Manufacturing and Services Purchasing Managers’ Index (PMI) in the United Kingdom has recently entered a state of contraction, indicating a decline in the overall health of these sectors. Additionally, the previously robust labor demand is diminishing.

The United Kingdom’s economy is currently experiencing a decline in its overall strength, primarily due to the prevailing uncertainty surrounding the future trajectory of interest rates in light of the upcoming general elections. The United Kingdom’s Prime Minister, Rishi Sunak, committed to reducing inflation by approximately 5.3% by the year’s conclusion.

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However, the recent decision by policymakers at the Bank of England to implement a pause indicates the possibility that the Prime Minister’s pledge may still need to be fulfilled. To facilitate subsequent measures, investors will direct their attention towards the forthcoming release of the final S&P Global Manufacturing and Services PMI, scheduled for the following week.

The British Pound Sees Gains as Investors Become Less Fearful About Taking Risks

  • The Pound Sterling has exhibited a resurgence, reaching a six-month low in the vicinity of 1.2110. This development comes as the prevailing risk-aversion sentiment gradually diminishes, although the overall outlook remains pessimistic.
  • The overall demand for assets perceived as risky continues to exhibit fragility, primarily due to the escalating prices of oil and the persistent presence of high inflation, which together intensify the vulnerabilities associated with a potential global deceleration.
  • The GBP/USD pair continues to experience significant downward pressure due to the challenging economic conditions in the UK, characterized by persistent inflationary pressures and escalating risks of a deepening recession.
  • In contrast to the robust state of the US economy, the United Kingdom is currently grappling with the challenges posed by elevated interest rates and their ensuing repercussions.
  • The Bank of England has taken the unexpected decision to halt its previously relentless pursuit of policy tightening, which had seen interest rates raised on 14 consecutive occasions.
  • The abrupt cessation of interest rate adjustments signifies a period of economic adversity within the United Kingdom. Before the temporary end, market participants had anticipated a potential interest rate culmination of 5.75% in light of the elevated inflationary pressures observed within the United Kingdom, which currently exhibits the highest inflation rate among the G7 nations.
  • The decision by the Bank of England to pause has increased potential upward pressures on inflation, further diminishing the economic prospects of the United Kingdom. The current state of labor demand indicates a notable softening while wage growth exhibits resilience, potentially contributing to a sustained elevation in inflation levels.
  • Concerns persist among investors regarding the ability of UK Prime Minister Rishi Sunak to effectively deliver on his commitment to reduce inflation by approximately 5.3% by the conclusion of the current year.
  • Concerns regarding a potential deceleration in the United Kingdom’s economy have intensified in light of the Services Purchasing Managers’ Index (PMI) transitioning into contractionary territory. Middle-class households’ reduced expenditure on services can be attributed to the adverse impact of elevated inflation rates, eroding their purchasing power.
  • The Bank of England’s decision to maintain interest rates has drawn attention to the bleak economic forecast. However, emerging indications suggest a potential improvement in the real estate industry, as prospective home-buyers anticipate the possibility of reduced mortgage rates. According to Zoopla, a prominent property website in the United Kingdom, there has been a notable increase of 12% in the volume of inquiries about new homes over the past four weeks.
  • In the current landscape, it is imperative to acknowledge the escalating hazards associated with the accumulation of debt within the United Kingdom’s economy. According to a report by Reuters, the Institute for Fiscal Studies (IFS) in Britain has projected a 90% probability of public borrowing exceeding the forecasted figures provided by the government’s budget watchdog in four years.
  • The appreciation of the US Dollar persists due to the prevailing risk-averse sentiment in the market, the enduring strength of the US economy, and the assertive monetary policy approach adopted by the Federal Reserve (Fed) about interest rates.
  • The US Dollar Index (DXY) is near reaching a notable 11-month pinnacle, approximately 107.00. The asset is anticipated to sustain its ongoing four-day streak of gains as investors redirect their attention toward the Federal Reserve’s favored measure of inflation.
  • On Wednesday, there was a notable strengthening of the US Dollar after disseminating unexpectedly favorable data regarding US Durable Goods Orders. The observed increase in orders, amounting to 0.2%, defied initial projections of a 0.5% decrease. In July, there was a notable decline of 5.6% in contracted orders.

Sterling Maintains Its Position at 1.2200. According to the Technical Analysis

The Pound Sterling has observed a notable increase in buying interest near the 1.2100 level, coinciding with an improvement in the risk appetite exhibited by market participants. The GBP/USD pair has experienced a resurgence after reaching a six-month low near the significant support level of 1.2100.

The potential downward trajectory in the GBP/USD pair may persist, leading toward the significant psychological support level of 1.2000, as indicated by the declining trend of the 200-day Exponential Moving Average (EMA). The current momentum indicators show a persistent presence of bearish sentiment, thereby substantiating the likelihood of further downward movement for the pair.

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Leon Kramer

Leon Kramer

Leon Kramer, a renowned financial author, enlightens Main Forex News readers with his deep understanding of currency markets. His years in global finance, combined with an intuitive grasp of trends, delivers insightful, up-to-the-minute foreign exchange analysis.

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