The British pound stabilized after recovering from its lowest levels in six months, as market sentiment improved and Catherine Mann, a Bank of England official, called for a more hawkish approach to reduce inflation to 2%.
Last week, Bank of England Governor Andrew Bailey said he expects inflation to drop to below 5% by the end of the year but added that he cannot promise price stability promptly.
The manufacturing and real estate sectors in the United Kingdom bear the brunt of rising interest rates.
Manufacturing activity in the UK has contracted for an extended period, with the Purchasing Managers’ Index (PMI) consistently below 50.0. To gain more insights into the current economic situation, investors will turn their focus to UK manufacturing activity and Gross Domestic Product (GDP) data for August, which will be released next Thursday.
The British pound faces some selling pressure near 1.2250 against the US dollar, but further gains seem possible as officials at the Bank of England support a more hawkish monetary policy in the future.
Catherine Mann, the head of the Bank of England who advocates for a hawkish policy, said on Monday that central bank governors need to be tougher.
She added that the central bank is not solely responsible for reducing inflation to 2%, but it also needs to control rising inflation expectations. Catherine Mann also expressed concerns about how long inflation will remain above the target of 2%. Inflation in the UK is higher compared to other G7 economies, and rising oil prices due to escalating tensions in Palestine may further increase inflation expectations.
I believe that due to the high inflation rates and interest rates set by the Bank of England, the UK economy is currently in a weak phase. Manufacturing output and construction spending in the UK have decreased due to companies’ concerns about demand expectations.
Investors will also focus on the Gross Domestic Product (GDP) report for August, which will be published on Thursday, providing more clues about the country’s economic performance. I expect a monthly contraction of 0.4% in industrial production, compared to a 0.8% contraction recorded in July, and a slower monthly contraction of 0.2% compared to a 0.7% contraction in July, as expected.
On the global level, investors seem to be taking into account the conflict in Palestine, as both sides have expressed readiness to discuss a ceasefire. However, it is not expected that ceasefire talks will happen soon as the risk of other countries getting involved in the conflict in the markets increases.
Currently, I believe that the US Dollar Index (DXY) has found some support after testing the key support level at 106.00.
With market focus shifting to inflation data in the United States, which will be released on Thursday and Friday, I expect the core Consumer Price Index (CPI), which excludes volatile food and oil prices, to rise by 0.3% every month, with the possibility of significant surprises in the results.
The US Dollar Index may also rise if the September inflation report is higher than expected. Persistent inflation and strong labor market conditions may force the Federal Reserve to choose another interest rate hike in early November.
Before these numbers, the minutes of the latest Federal Open Market Committee meeting will be closely watched, set to be released tomorrow.
The minutes for the September meeting will likely provide a logical basis for keeping interest rates unchanged for longer than expected, which strengthens the dollar and negatively impacts the pound and dollar-denominated assets and currencies.