The pound has recovered after hitting a six-month low. The improved market sentiment and hawkish comments from Bank of England (BoE) policymaker Katherine Mann have offered support to the British currency. Mann has called for a more aggressive approach to monetary policy to bring down inflation to the central bank’s 2% target. Last week, BoE Governor Andrew Bailey said he anticipated inflation to fall around 5% or even below it by year-end, but explained that price stability may not be achieved in a timely manner.
With higher interest rates, both the UK manufacturing and construction sectors have suffered. Factory activity in the UK continued to shrink, with the PMI figure coming in below the 50.0 threshold for a long period. For further insights into the state of the UK economy, investors will closely watch the release of UK factory activity and GDP data for August, which will be released on Thursday.
Pound Sterling expected to gain against the USD
While the GBP/USD faced some selling pressure, market participants expect the pound to remain supported as Bank of England policymakers favour more aggressive monetary policy.
Hawkish BoE policymaker Katherine Mann said on Monday that central bankers need to be more hawkish to tame inflation. As she clarified, the central bank is not only responsible for bringing down inflation to 2%, but also is expected to manage rising inflation expectations. She added that there are concerns about stubborn inflation and how long it may remain elevated above the 2% target.
UK inflation is higher than other G7 economies and due to the growing Middle East tensions and rising oil prices, inflation expectations may increase.
Higher inflation and interest rates by the BoE have weighed on the economy and firms are worried about the demand outlook, with manufacturing output and construction spending declining.
Looking ahead: UK factory activity and GDP data
Investors will now turn their attention towards UK factory activity and the August GDP report due out this Thursday. The report will shed more light on how well the British economy has fared. Economists expect monthly Manufacturing Production to contract by 0.4%, while monthly Industrial Production is anticipated to come in at 0.2%. The continued decline in UK factory activity is expected to reflect firms’ pessimism about forward demand despite a pause in the BoE’s policy tightening. The monthly Gross Domestic Product (GDP) is expected to expand by 0.2%.
On Wednesday, we also note the release of the FOMC minutes from the last Fed meeting. The FOMC minutes for September’s monetary policy will likely provide clues in relation to the bank’s decision to keep interest rates unchanged.
Geopolitical tensions
The Israel-Hamas war and the possibility of discussions over a truce is ongoing and the dust hasn’t settled yet to know how markets may react. Talks about a ceasefire may not happen any time soon, while the risk of participation from other countries is increasing. The war could drive investors away from risk assets, but some analysts believe that in terms of broader moves, markets have already digested the implications of the conflict.