Pound Sterling holds recovery in spite of weak UK factory data

• Pound Sterling gains remain unabated despite the UK’s poor factory data.
• UK firms cut heavily on input costs due to poor demand outlook.
• BoE's Swati Dhingra favored a rate cut if the growth rate dropped more than expectations.

The Pound Sterling (GBP) holds onto gains inspired by the higher risk appetite of the market participants.  The GBP/USD pair remains bullish despite the Office for National Statistics (ONS) reporting that United Kingdom factory data in August contracted for the second time in a row. UK firms operated on lower capacity as they aimed to achieve efficiency by cutting higher inventory backlogs and their respective labor forces due to declining demand.

A slowdown in demand and declining overall output is expected to discomfort Bank of England (BoE) policymakers, who are preparing for November’s interest rate decision. While the BoE's Katherine Mann continued to favor further policy-tightening to bring down inflation to 2% in a timely manner, the central bank's Swati Dhingra supported a rate cut if the growth rate fell beyond expectations.

Daily Digest Market Movers: Pound Sterling holds recovery despite weak UK data

• Pound Sterling manages to remain upbeat despite weak UK factory data for August.
• Monthly Industrial Production contracted at a higher pace of 0.7%, while investors forecasted a decline by 0.2%. In the same period, the pace of decline in Manufacturing Production was double expectations of 0.4%. In July, the factory data contracted by more than 1%.
• On an annualized basis, Industrial Production landed at 1.3%, below the estimates of 1.7% but higher than the former reading of 1%. The Manufacturing Production at 2.8% remained below the expectations and July’s reading of 3.4% and 3.1%, respectively.
• The monthly Gross Domestic Product (GDP) grew by 0.2% as expected. In July, the overall output contracted by 0.6%.
• The factory data has contracted for the second time in a row as UK firms have cut down on inventory and labor due to a poor demand outlook.
• Meanwhile, investors remain mixed about Bank of England’s interest rate outlook as the UK economy is operating at higher inflation, which is more than three times the desired rate of 2%.
• This week, BoE policymaker Katherine Mann said that central bankers should adopt an aggressive approach toward interest rates. The central bank has to bring down rising inflation expectations along with its priority of bringing down inflation to 2%.
• Contrary to Mann, BoE policymaker Swati Dhingra said the UK economy has already ‘flatlined’ and that almost 25% of the impact of higher interest rates has already been absorbed by the economy. She favored a rate cut sooner rather than later if the growth rate declines beyond expectations.
• The risks of a rebound in inflation are persistent as deepening Middle East tensions would keep the oil market extremely tight through 2024. Also, expected participation of Iran in the Israel-Hamas conflict could disrupt supply chain significantly.
• Shortage of energy in the UK economy due to supply chain disruptions could accelerate headline inflation, and UK Prime Minister Rishi Sunak may miss fulfilling his promise of halving inflation to 5.2%.
• The US Dollar Index (DXY) seems stabilized below the crucial support of 106.00, which has turned as resistance now. High volatility is anticipated in the USD Index ahead of the release of the consumer inflation data for September, which will be published at 12:30 GMT.
• The US inflation data is expected to remain hot, considering the strong rebound in the producer inflation report that was released on Wednesday.
• Meanwhile, expectations of one more interest rate increase from the Federal Reserve increased on Wednesday after the release of the FOMC minutes, which indicated that a majority of policymakers support further policy-tightening.

Technical Analysis: Pound Sterling remains stable above 1.2300

The Pound Sterling stabilizes above the crucial resistance of 1.2300 as market sentiment has improved. The broader risk outlook is still cautious as participation of more nations in Middle East conflicts could injure the global supply chain significantly. The Cable has climbed above the 20-day Exponential Moving Average (EMA) at 1.2280, which indicates that the short-term trend has turned bullish.