Pound Sterling tumbles on hotter US headline inflation 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) faces intense selling pressure as the stable United States core Consumer Price Index (CPI) for September month has weakened the risk appetite of the market participants. The outlook for the GBP/USD pair dampened as the Office for National Statistics (ONS) reported 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 appeal fades as market sentiment dampens

• Pound Sterling fails to remain upbeat as the market mood dampens after a nominal decline in the US core inflation as expected. Also, weak UK factory data for August impacted the Pound Sterling.
• 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 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 the 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 declined 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, the expected participation of Iran in the Israel-Hamas conflict could disrupt the 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 recovers sharply after the inflation report for September remained mostly in line with estimates. The headline CPI expanded at a higher pace of 0.4% while investors anticipated the growth at 0.3%. Monthly and annual core inflation remained in line with estimates at 0.3% and 4.15 respectively.
• Meanwhile, expectations of one more interest rate increase from the Federal Reserve remained lower as Fed policymakers have turned worried about rising US Treasury yields.

Technical Analysis: Pound Sterling drops sharply to near 1.2250

Pound Sterling faces selling pressure above the crucial resistance of 1.2300 as market sentiment improved. The broader risk outlook remains 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.