GBP/USD displays volatility contraction below 1.2400 ahead of US/UK PMIs

• GBP/USD is showing a lackluster performance as investors await US/UK PMIs for fresh cues.
• The Fed might decelerate its interest rate hike pace again to 25 bps in its February policy meeting.
• UK’s Manufacturing PMI might trim to 45.0 while Services PMI to remain steady at 49.9.

The GBP/USD pair is displaying topsy-turvy moves around 1.2380 as investors are awaiting the release of the S&P PMI number for the United States and the United Kingdom for fresh impetus. The Cable is demonstrating signs of volatility contraction as market sentiment has been caught by caution.

S&P500 futures are showing marginal losses after a bullish Monday, portraying a caution in getting gung-ho over risk-sensitive assets. Meanwhile, the return generated by the US government bonds has trimmed marginally as the odds of deceleration in the pace of hiking interest rates by the Federal Reserve (Fed) in its February monetary policy meeting are escalating further. The 10-year US Treasury yields have slipped to near 3.51%.

The US Dollar Index (DXY) recovered firmly on Monday after dropping to near a seven-month low around 101.20, however, the upside move got restricted above 101.80.

Inflation in the United States is declining and has been confirmed by various catalysts. Retail demand is subdued, employment is not generating at a healthy pace, the scale of economic activities is falling, and firms are offering products at lower prices at factory gates. This is resulting in rising expectations that the Federal Reserve (Fed) might trim the extent of the interest rate hike again.

Fed chair Jerome Powell has already trimmed the interest rate hike extent to 50 basis points (bps) in its December monetary policy meeting after four consecutive 75 bps rate hikes. The Fed is expected to hike interest rates by 25 bps ahead. As per the CME FedWatch tool, the chances of a 25 bps interest rate hike stand more than 98%.

But before that, investors’ focus will remain on the release of Tuesday’s United States S&P PMI data. The Manufacturing PMI is seen lower at 46.1 from the former release of 46.2 while the Services PMI might contract to 44.5 vs. the prior figure of 44.7.

On the United States front, preliminary Manufacturing PMI (Jan) is seen contracting to 45.0 against the prior release of 45.3. The Services PMI is seen steady at 49.9. Apart from that, UK’s Producer Price Index (PPI) data will remain in focus, which is scheduled for Wednesday.