Pound Sterling remains upbeat ahead of UK factory data

• Pound Sterling holds onto gains ahead of US factory and GDP data.
• UK factory data is expected to contract due to a vulnerable demand outlook.
• BoE’s Katherine Mann supports further policy tightening to bring down inflation to 2%.

The Pound Sterling (GBP) continues its rally into a sixth day on Wednesday as investors shift their focus to United Kingdom factory data for August, which will be published on Thursday. The GBP/USD pair capitalizes on hawkish guidance from Bank of England (BoE) policymaker Katherine Mann and upbeat market sentiment. The Pound Sterling has performed better against the US Dollar as market participants are not expecting a further widening of the policy divergence between the BoE and the Federal Reserve (Fed).

UK economic activities have been facing the wrath of higher interest rates. Factory activities for August are expected to continue their contracting spell as the weak demand environment has dented the domestic and overseas markets. In addition to that, UK firms have cut their inventory backlog heavily, as well as labor to achieve efficiency in operations. They appear reluctant to add capacity due to higher borrowing costs.

Daily Digest Market Movers: Pound Sterling strengthens ahead of UK data

• Pound Sterling extends winning spell as market mood remains upbeat despite Middle East conflicts.
• The GBP/USD pair has recorded a bullish closing for five trading sessions in a row as investors expect that policy divergence between the Fed and the BoE will not widen further.
• In September, the BoE surprisingly announced a pause in rate hiking to avoid further calamity in the UK’s economic activities.
• The UK’s factory activity, Services PMI, and construction activities have remained below the 50.0 threshold in September, facing the consequences of the BoE’s battle with inflation.
• The recovery move in the Pound Sterling is not backed by supportive fundamentals. Therefore, it could face selling pressure as BoE policymaker Katherine Mann favors an aggressive approach to bring down inflation to 2% in a timely manner. 
• BoE’s Financial Policy Committee (FPC) warned on Tuesday that households may continue to face financial hardships due to increasing borrowing costs. 
• BoE’s Mann warned that in addition to lowering inflation to 2%, the central bank needs to wipe out rising consumer inflation expectations too.
• The UK inflation could rebound as rising oil prices due to the Israel-Palestine conflict would accelerate consumer inflation globally. The IMF warned that a 10% increase in Oil prices would weigh down global output by about 0.2% in the following year, boosting global inflation by about 0.4%.
• Going forward, investors will focus on the UK factory activity data for August, which will be published on Thursday at 06:00 GMT. 
• Investors see monthly Manufacturing Production contracting by 0.3% against a 0.8% contraction recorded for July. Monthly Industrial Production is foreseen to decline at a slower pace of 0.2% against the contraction by 0.7% in July. 
• The annual Manufacturing and Industrial production data are expected to accelerate to 3.4% and 1.7%, respectively. The monthly Gross Domestic Product (GDP) is seen expanding by 0.2% against a decline of 0.5% recorded for July.
• The GBP/USD pair has managed to perform better due to a correction in the US Dollar. The US Dollar Index (DXY) has stabilized below 106.00 as Fed policymakers continue to support an unchanged interest rate policy in November due to rising Treasury yields.
• The volatility in the USD Index is expected to remain high amid the release of the Federal Open Market Committee (FOMC) minutes and the producer inflation data. 
• The FOMC minutes will provide a detailed explanation behind September’s unchanged interest rate decision. Apart from that, outlook on inflation and interest rates will be keenly watched.
• This week, investors will pay attention to September CPI data, which will shape the monetary policy decision for November’s meeting.

Technical Analysis: Pound Sterling closes positive for five sessions in a row

Pound Sterling recorded a five-day winning streak through Tuesday, and that record of gains appears to be continuing on Wednesday as well. GBP/USD is expected to continue the same as the risk appetite of market participants has improved. The GBP/USD pair climbs above the 20-day Exponential Moving Average (EMA), which trades around 1.2273. The broader GBP/USD outlook is bearish as the 50 and 200-day Exponential Moving Averages (EMAs) have delivered a Death Cross near 1.2450. Potential support is placed around 1.2000.