Pound Sterling prepares for action as recession risks deepen

• Pound Sterling trades sideways as investors need fresh cues about the BoE’s possible interest rate peak.
• UK inflation is highest among G7 economies due to labor shortages and strong wage growth.
• BoE policymakers warned that interest rates will remain higher for a longer period.

The Pound Sterling (GBP) struggles for a decisive move as investors await fresh cues about the interest rate peak from the Bank of England (BoE). The GBP/USD pair turns delicate as BoE policymakers, including Deputy Governor Ben Broadbent and Chief Economist Huw Pill, warned that sufficiently restrictive policy needs to be maintained longer to bring down the core Consumer Price Index (CPI) to the desired rate of 2%.

Investors hope that the UK economy cannot avoid a recession as higher interest rates are critically impacting the housing sector and factory activities. The UK’s economic outlook has deteriorated as core inflation is hovering near its all-time high due to labor shortages and strong wage growth. Meanwhile, the BoE is preparing to raise interest rates further in September. An interest rate hike of 25 basis points (bps) is expected that will push interest rates to 5.50%.

Daily Digest Market Movers: Pound Sterling remains delicate as recession fears soar

• Pound Sterling stabilizes below the round-level resistance of 1.2700 as fears of a recession in the UK economy grow on the belief that the Bank of England (BoE) will keep interest rates higher.
• UK inflation is highest among G7 economies and requires a tight interest rate policy for a longer period to ensure price stability.
• BoE Deputy Governor Ben Broadbent warned this week that inflation will not fade as quickly as it emerged despite soft energy prices.
• Core inflation is still hovering near its all-time peak of 7.1% as labor shortages and strong wage growth are still a major concern for BoE policymakers.
• On Thursday, BoE Chief Economist Huw Pill said that there are many ways to bring down inflation and that keeping interest rates higher for a longer period is one of them.
• BoE Pill warned that there are cases for caution on inflation despite the fall in the headline rate. He further added that the economy is facing second-round inflationary effects and that services inflation is developing less benignly. Also, core inflation is not yet showing a downtrend.
• For September monetary policy, investors hope that the central bank will raise interest rates consecutively by 25 basis points (bps) to 5.50%. This would be the 15th consecutive interest rate hike of the current tightening cycle.
• On Wednesday, UK PM Rishi Sunak received a resignation letter from UK Defence Minister Wallace and named Grant Shapps as the new Defence secretary.
• The UK economic calendar remains light this week while investors focus on the S&P Global Manufacturing PMI for August, which will provide cues about the current status of factory activities. The economic data is forecast to be unchanged at 42.5
• Market sentiment remains bearish after the US Personal Consumption Expenditure (PCE) price index for July rose from June’s figures.
• The US Dollar Index (DXY) clings to recovery near 103.70 as the stubborn PCE price index offset the soft ADP Employment Change report.
• Hopes of a pause in the policy tightening spell by the Federal Reserve inspired by soft labor demand were neutralized as US PCE grew at a steady pace in July.
• On Thursday, the US Department of Labor reported individuals claiming jobless benefits for the week ending August 25 dropped to 228K vs. expectations of 235K and the former reading of 232K.
• Meanwhile, investors shift their focus toward the Nonfarm Payrolls (NFP) and the ISM Manufacturing PMI for August, which will be published at 12:30 GMT and 14:00 GMT.
• Analysts at TD Securities noted, “Payrolls likely posted another sub-200k gain in August, remaining in the vicinity of the Jun-Jul gains. The August increase would maintain the downtrend in the three-month pace, barring any major revisions. The Unemployment Rate to stay unchanged at 3.5%, following its second consecutive decline in July. Wage growth to print 0.3% m/m (4.3% y/y).”

Technical Analysis: Pound Sterling stabilizes below 1.2700

Pound Sterling consolidates near 1.2650 after a corrective move from the weekly high of 1.2746 as a risk-off impulse emerges. The Cable is consistently failing to sustain above the 20 and 50-day Exponential Moving Averages (EMAs), which indicates that investors are considering pullbacks as a selling opportunity. A fresh downside would emerge if the asset drops below the crucial support of 1.2600.