Pound Sterling extends downside on UK’s poor demand outlook

  • Pound Sterling dips after choppy moves ahead of S&P Global Services PMI data.
  • UK’s Services PMI is set to contract for the second time in a row.
  • The BoE paused the policy-tightening spell, while inflation is still more than thrice the desired rate of 2%.

The Pound Sterling (GBP) struggles for a firm footing despite a consistent sell-off in the past three months. The GBP/USD pair faces a ruthless sell-off as the United Kingdom economy muddles against the headwinds of poor economic prospects and sticky inflation. UK inflation is still more than thrice the target rate of 2%, and the Bank of England (BoE) feels discouraged about raising interest rates further due to deepening recession risks.

After a more than year-long contraction spell in the Manufacturing PMI, the UK’s Services PMI is forecasted to remain below the 50.0 threshold for the second time in a row. British producers have cut back on new orders and labor due to tepid demand. Rising oil prices and supply chain disruptions could push the UK economy further on the backfoot.

Daily Digest Market Movers: Pound Sterling extends downside ahead of Services PMI data

  • Pound Sterling fails to defend the crucial support of 1.2050 ahead of the Services PMI data for September, which will be published at 8:30 GMT.
  • As per the estimates, the Services PMI is seen unchanged at 47.2. This would be the second straight month of contraction in service activities. A figure below the 50.0 threshold indicates a contraction.
  • UK economic activities are consistently facing the wrath of higher interest rates. Firms seem fully pessimistic about the economic outlook due to declining domestic and overseas demand.
  • This week, the UK Manufacturing PMI extended its contracting spell for its 14th straight period as firms cut back output, new orders, and employment amid deteriorating demand.
  • While the UK economy is struggling for a firm footing due to economic turmoil, higher inflation is still a concern for Bank of England policymakers despite raising interest rates to 5.25%.
  • The majority of BoE policymakers favor an unchanged interest rate decision in September, while Katherine Mann sees monetary policy as not sufficiently restrictive to bring down inflation to 2%.
  • BoE Mann further added that policymakers are facing a “world where inflation shocks are likely to be more frequent” with stronger price growth, meaning interest rates will need to be permanently higher.
  • Amidst all negative headlines about the UK’s economic prospects and sticky inflation, the British Retail Consortium (BRC) reported that food price inflation fell for the fifth month in a row to a single-digit annualized rate of 9.9% from 11.5%. 
  • BRC Chief Executive Helen Dickinson said we expect shop price inflation to continue to fall over the rest of the year but warned that rising oil prices, a global shortage of sugar, and supply disruptions due to the war in Ukraine could dampen the trend.
  • On the global trade front, Business & Trade Minister Kemi Badenoch said at the Conservative Party conference that there was “zero” chance of a free trade agreement with the United States under President Joe Biden’s administration, as reported by Reuters.
  • Meanwhile, the market mood remains quiet as investors await the United States Employment Change data to be reported by ADP at 12:15 GMT. As per the consensus, private payrolls are expected to increase by 153K in September, lower than August’s reading of 177K. 
  • The US labor market data for September is going to shape the Federal Reserve’s (Fed) November monetary policy.
  • The US Dollar Index (DXY) holds rallies near 107.20 as the odds for one more interest rate increase from the Fed soar after hawkish guidance from Cleveland Fed Bank President Loretta Mester and Fed Governor Michelle Bowman.
  • In August, US JOLTS Job Openings data remained upbeat. Employers posted 9.61 million job vacancies against expectations of 8.8 million.

Technical Analysis: Pound Sterling skids below 1.2050

Pound Sterling dropped after trading directionless near a six-month low around 1.2070, continuing its prolonged sell-off due to a cautious market mood. The GBP/USD pair outlook remains vulnerable as the 50 and 200-day Exponential Moving Averages (EMAs) are on the verge of delivering a Death Cross. The Cable is expected to decline further toward the psychological support of 1.2000. Momentum oscillators are trading in a bearish trajectory, warranting more weakness ahead.

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