Pound Sterling remains non-directional despite disappointing manufacturing data

• Pound Sterling is struggling to show a power-pack action despite a wider-than-anticipated contraction in UK factory activities.
• More interest rate hikes by the BoE seem possible as UK’s inflationary pressures are extremely stubborn.
• UK’s labor wages showed more persistence as firms are offering higher payouts to offset labor supply shortage.

The Pound Sterling (GBP) has remained inside the woods after the release of weak United Kingdom factory activity data. The GBP/USD pair is showing a non-directional performance as investors are assessing UK economic indicators to build projections for the Bank of England’s (BoE) interest rate policy.

Stubborn food inflation and extreme labor shortages are a big reason to worry for BoE policymakers as United Kingdom’s current inflationary pressures are four times higher than the desired rate. Meanwhile, the absence of evidence showing a slowdown in inflationary pressures is solidifying the need for more interest rate hikes by the UK central bank.

Daily digest market movers: Pound Sterling holds auction confidently amid hawkish BoE bets

• United Kingdom’s Gross Domestic Product (GDP) expanded by 0.2% on a monthly basis in April, as expected.
• Monthly Industrial Production and Manufacturing Production in the UK contracted at a stronger pace than expected in April, by 0.3%.
• The UK Office for National Statistics (ONS) reported goods trade deficit narrowed to 14.996 billion GBP.
• Labor shortages and 45-year high food inflation at 19% remain major catalysts behind United Kingdom’s inflationary pressures.
• Brexit event and the approach to early retirement by individuals after Covid have been major factors of labor shortage.
• Three-month Unemployment Rate declined to 3.8% in Aril in the UK. The Claimant Count Change decreased by 13,600, against analysts’ forecast for a decline of 9,600.
• The unavailability of talent has fueled payroll bills spent by firms for fresh hiring. Average Earnings Excluding Bonuses rose 7.2% in April, surpassing the market expectation and the previous release of 6.9% and 6.8%, respectively, by a wide margin.
• May’s UK Employment data have propelled chances of further policy-tightening by the Bank of England.
• Current interest rates by the BoE are at 4.5% and one more interest rate hike of 25 basis points (bps) will push rates to 4.75%.
• BoE Governor Andrew Bailey assured that inflation will come down, but it will take longer than expected while speaking before the House of Lords Economic Affairs Committee.
• BoE policymaker Catherine Mann said on Tuesday, “Wage increases of 4.0% would be a challenge to returning CPI to 2.0%.”
• Current UK inflationary pressures indicate that UK PM Rishi Sunak won’t be able to stick to his promise of halving inflation by year-end.
• The US Dollar is trying to get on its feet ahead of the interest rate decision by the Federal Reserve (Fed).
• Soft landing of United States inflation, easing labor market conditions, and weak economic activities have improved the chances of the Fed leaving its policy rate unchanged following the June 13-14 meeting.

Technical Analysis: Pound Sterling aims to recapture an annual high around 1.2700

The Pound Sterling has confidently climbed above the round-level resistance of 1.2600 as the pullback move to near 1.2490 was capitalized by the market participants as a buying opportunity. The Cable is approaching the annual high of 1.2700 as an interest rate hike by the Bank of England will trim the Fed-BoE policy divergence. Advancing 50-and 200-period Exponential Moving Averages (EMAs) on an intraday timeframe are indicating that the short-term and long-term trend is bullish.

Sentiment for the GBP/USD pair would improve further if it manages to surpass a two-month high around 1.2620. The Pound Sterling could lose its strength if the Cable drop below June’s low around 1.2370.