What are the factors contributing towards the sterling’s decline since the 4th of August?
This article was written by Arjun Lakhanpal, FX trader and financial market analyst at SAVI Trading.
Sterling has recently come under substantial selling pressure, dropping below the critical 1.3000 support level for the first time in more than a month after dovish remarks from MPC member Ian McCafferty conveying that more QE may be needed if the UK’s economic outlook deteriorates.
McCafferty specified that if the economy decelerates in line with the initial survey signals, then additional easing is likely to be warranted with the BoE cutting rates further. He also said that the bank should follow a steady approach in its reaction given that post-referendum figures are still inadequate.
The pound dropped following these remarks, perhaps because he is a well-known hawk within the MPC who also disputed the August decision to launch further QE, though he did vote for a rate cut. Therefore his remarks imply that even the most hawkish MPC members are open to further easing if the data are generally in line with the bank’s inflation report estimates, thus make future easing seem more likely.
Considering the BoE’s easing bias, the short-term position for the pound remains negative. Slowing investment inflows to the UK in coming months could cause the nation’s current account deficit to widen more somewhat that could add even more strain on sterling.
Other factors contributing towards the sterling’s decline since the 4th of August include the first BOE rate cut since 2009 and the launch of more than the projected scale of QE. Also, the robust nonfarm payroll figure released on 5th Aug resulted in the strengthening of the dollar against sterling and other currencies.
The manufacturing sector which accounts for roughly around 10% of the UK GDP has also seen fading demand and job cuts. In July, the sector posted the quickest slowdown in three years, stemming from uncertainty and reduction of orders. The softness of sterling drives up the cost of imported materials while the benefits in terms of price competitiveness for finished goods often takes longer to be attained. Foreign investment will also likely decline due to the indefinite business environment, will likely hit the demand for labour force.
After the Brexit vote, overall economic data has disappointed, such as the Services PMI and Manufacturing PMI released on 25th July both pointing to a contraction and economic slowdown. In addition, the current account deficit of the UK is about 7% of the GDP, which is higher than most developed countries and is weighing on the sterling.
Therefore the aftermath of the Brexit vote, the large trade balance deficit, the BoE’s rate cut and stimulus measures, as well as the strengthening of the dollar result in the long term mean that sterling is likely to be bearish potentially heading towards post-Brexit lows.
This article was written by Arjun Lakhanpal, FX trader and financial market analyst at SAVI Trading.
Sterling has recently come under substantial selling pressure, dropping below the critical 1.3000 support level for the first time in more than a month after dovish remarks from MPC member Ian McCafferty conveying that more QE may be needed if the UK’s economic outlook deteriorates.
McCafferty specified that if the economy decelerates in line with the initial survey signals, then additional easing is likely to be warranted with the BoE cutting rates further. He also said that the bank should follow a steady approach in its reaction given that post-referendum figures are still inadequate.
The pound dropped following these remarks, perhaps because he is a well-known hawk within the MPC who also disputed the August decision to launch further QE, though he did vote for a rate cut. Therefore his remarks imply that even the most hawkish MPC members are open to further easing if the data are generally in line with the bank’s inflation report estimates, thus make future easing seem more likely.
Considering the BoE’s easing bias, the short-term position for the pound remains negative. Slowing investment inflows to the UK in coming months could cause the nation’s current account deficit to widen more somewhat that could add even more strain on sterling.
Other factors contributing towards the sterling’s decline since the 4th of August include the first BOE rate cut since 2009 and the launch of more than the projected scale of QE. Also, the robust nonfarm payroll figure released on 5th Aug resulted in the strengthening of the dollar against sterling and other currencies.
The manufacturing sector which accounts for roughly around 10% of the UK GDP has also seen fading demand and job cuts. In July, the sector posted the quickest slowdown in three years, stemming from uncertainty and reduction of orders. The softness of sterling drives up the cost of imported materials while the benefits in terms of price competitiveness for finished goods often takes longer to be attained. Foreign investment will also likely decline due to the indefinite business environment, will likely hit the demand for labour force.
After the Brexit vote, overall economic data has disappointed, such as the Services PMI and Manufacturing PMI released on 25th July both pointing to a contraction and economic slowdown. In addition, the current account deficit of the UK is about 7% of the GDP, which is higher than most developed countries and is weighing on the sterling.
Therefore the aftermath of the Brexit vote, the large trade balance deficit, the BoE’s rate cut and stimulus measures, as well as the strengthening of the dollar result in the long term mean that sterling is likely to be bearish potentially heading towards post-Brexit lows.
ABOUT THE AUTHOR: I am currently an FX Trader and Financial Market Analyst at SAVI Trading, which requires daily technical analysis on all the major FX pairs whilst looking at equity, bond and commodity space for correlations and overall market sentiment. My trading style looks to incorporate fundamental analysis with technical to identify strong trends and/or reversal signals in the market. I detail entry, stop and targets to ensure the trade set up is clear.
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Network, Learn, Grow | FMAS:24
Network, Learn, Grow | FMAS:24
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Get ready to mark your calendars for FMAS:24, returning this May! Take a quick glimpse of what awaits at the Sandton Convention Centre in Sandton, South Africa from May 20-22, 2024.
Don't miss out on this 5-second invite packed with energy and urgency!
Secure your free ticket now 🔗 https://events.financemagnates.com/yQx0l?utm_source=youtube&utm_campaign=fmas-is-back&utm_medium=video&RefId=FMAS24+Video+Ad+%5B1%5D
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Here's a sneak peek into the FMAS:24 vibrant atmosphere! Join us at Africa’s premium financial event for a transformative experience that combines the best of finance and technology.
From May 20-22, 2024, the Sandton Convention Centre in Sandton, South Africa, will be the hub for over 3,500 attendees to engage in unparalleled networking opportunities, learn from over 150 industry-leading speakers, and explore innovations from 120+ exhibitors.
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Here's a sneak peek into the FMAS:24 vibrant atmosphere! Join us at Africa’s premium financial event for a transformative experience that combines the best of finance and technology.
From May 20-22, 2024, the Sandton Convention Centre in Sandton, South Africa, will be the hub for over 3,500 attendees to engage in unparalleled networking opportunities, learn from over 150 industry-leading speakers, and explore innovations from 120+ exhibitors.
Secure your free ticket now 🔗 https://events.financemagnates.com/yQx0l?utm_source=youtube&utm_campaign=fmas-is-back&utm_medium=video&RefId=FMAS24+Video+Ad+%5B1%5D
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Join 3500+ Attendees at FMAS:24 | Africa's Premium Financial Event
Join 3500+ Attendees at FMAS:24 | Africa's Premium Financial Event
Looking to expand your network in #Africa? Join 3500+ attendees at FMAS:24, where online trading, fintech, payments, and crypto meet! Connect with industry leaders and innovators for an unmatched networking experience.
20-22 MAY 2024
Sandton Convention Center, Sandton, South Africa
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Join 3500+ Attendees at FMAS:24 - Africa's Premium Financial Event
Join 3500+ Attendees at FMAS:24 - Africa's Premium Financial Event
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Looking to expand your network in #Africa?
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Where the Prop Trading Industry Goes from Here | Finance Magnates Podcast
Where the Prop Trading Industry Goes from Here | Finance Magnates Podcast
Explore the tumultuous world of prop trading in this Finance Magnates podcast episode, featuring insights from Head of Axi Select, Greg Rubin.
We're discussing the challenges and shifts caused by MetaQuotes' pivotal decisions affecting MT4 and MT5 users, and how Axi Select offers a unique, realistic path to professional trading, steering clear of traditional prop firm pitfalls.
Tune in for expert analysis on the future of trading and innovative funding models.
The Axi Select programme is only available to clients of AxiTrader Limited. CFDs carry a high risk of investment loss. In our dealings with you, we will act as a principal counterparty to all of your positions. This content is not available for AU, NZ, EU and UK residents. For more information, refer to our Terms of Service. Standard trading fees apply.
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Explore the tumultuous world of prop trading in this Finance Magnates podcast episode, featuring insights from Head of Axi Select, Greg Rubin.
We're discussing the challenges and shifts caused by MetaQuotes' pivotal decisions affecting MT4 and MT5 users, and how Axi Select offers a unique, realistic path to professional trading, steering clear of traditional prop firm pitfalls.
Tune in for expert analysis on the future of trading and innovative funding models.
The Axi Select programme is only available to clients of AxiTrader Limited. CFDs carry a high risk of investment loss. In our dealings with you, we will act as a principal counterparty to all of your positions. This content is not available for AU, NZ, EU and UK residents. For more information, refer to our Terms of Service. Standard trading fees apply.
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