Sterling gains on upbeat UK factory data, GDP growth expected

• Pound sterling easy recovers against its main peers after the UK’s ONS reported solid factory data and expected GDP growth in August.
• Traders expect the BoE to cut interest rates in at least one of the two remaining policy meetings this year.
• Investors await US PPI data for further clues on the Fed’s interest rate outlook.

The British pound (GBP) is moving lower against its major peers in the London session on Friday after the release of UK data. The initial reaction to the British currency was positive, but it failed to capitalize on the same, despite the fact that data came in better than expected and Gross Domestic Product (GDP) rose in August.

The Office for National Statistics (ONS) reported that the economy grew by 0.2%, as expected, after being flat in July. Manufacturing output and industrial production rose month-on-month at a robust 1.1 percent and 0.5 percent, respectively, while economists had expected a 0.2 percent increase.

Annually, manufacturing and industrial production contracted by 0.3% and 1.6%, respectively. However, the pace at which both economic data fell was slower than in July.

Upbeat monthly factory data and an expected rise in GDP boosted the UK economic outlook. This would allow Bank of England (BoE) policymakers to pursue a shallow policy easing cycle. Financial market participants expect the BoE to cut interest rates only once in the other two policy meetings this year.

Going forward, the next trigger for the pound will be UK employment data for the three months to August and the Consumer Price Index (CPI) report for September, which will be released on Tuesday and Wednesday respectively. Economic data will significantly influence market expectations of the BoE’s likely interest rate action in November.

Daily Market Reasons: Sterling Remains Weak Against US Dollar Ahead of US PPI

• The British pound is down against the US dollar (USD) on Friday. GBP/USD is trading slightly above the monthly low of 1.3010, but the outlook is cautious as the greenback remains firm. The US Dollar Index (DXY), which tracks the greenback against six major currencies, is holding on to gains near 103.00.
• The US dollar clings to gains as warmer-than-expected US consumer price index (CPI) data for September maintained the Federal Reserve’s (Fed) target to cut interest rates again by 50 basis points basis (bps) in the November meeting on the table.
• Thursday’s CPI report showed annual core inflation – which excludes volatile food and energy prices – accelerated to 3.3%. Headline inflation rose 2.4%, faster than estimates of 2.3% but slower than August’s print of 2.5%.
• Still, traders are confident the Fed will cut interest rates next month, but at a gradual pace of 25 bps, according to CME’s FedWatch tool. Also, most Fed policymakers see more interest rate cuts as appropriate.
• On Thursday, New York Fed President John Williams said at an event at Binghamton University: “Based on my current outlook for the economy, I expect it will be appropriate to continue the process of moving monetary policy to a more neutral stance. setting in time”.
• On the economic front, investors will focus on US producer price index (PPI) data for September due at 12:30 GMT. Headline annual PPI is estimated to have eased to 1.6% from 1.7% in August. By contrast, the core PPI – which strips out volatile food and energy prices – is expected to have accelerated at a faster pace to 2.7% from 2.4% in August.

Technical Analysis: Sterling remains below the 20- and 50-day EMAs

Sterling remains under pressure near the monthly low of 1.3010 against the US dollar. The outlook for GBP/USD is vulnerable as it has stabilized below the uptrend line drawn from the December 28, 2023 high of 1.2827.

The short-term trend of the cable has turned bearish as it is trading below the 20- and 50-day exponential moving averages (EMA), which are trading around 1.3167 and 1.3106 respectively.

The 14-day Relative Strength Index (RSI) is falling to near 40.00. More disadvantages would occur if the pulse oscillator drops below the level mentioned above.

Looking to the upside, resistance at the round level of 1.3100 and 20-day EMA near 1.3170 will be a major barricade for GBP bulls. On the downside, the pound would find support near the psychological 1.3000.