Pound Sterling recovery attempt seems short-lived amid poor economic outlook

• Pound Sterling attempts recovery as the risk-off profile eases, while broader bias is still weak.
• The UK economy shrank in July due to a sheer decline in service sector output.
• Investors await the inflation data for August, which will be released next week.

The Pound Sterling (GBP) attempts a recovery move as investors start digesting the upside risks of the global economic slowdown, while the absence of supportive fundamentals keeps the overall trend wobbly. The GBP/USD pair could resume the downside journey as the tight interest rate policy by the Bank of England (BoE) has dampened the labor demand outlook and has exposed the economy to a possible recession.

The UK economy shrank in July due to a sheer decline in service sector output as persistent inflation narrowed households’ pockets. Inflation risks are skewed to the upside as wage growth remains strong. The Pound Sterling is expected to deliver a bumpy ride as investors shift focus to the Consumer Price Index (CPI) data for August, which will be released next Wednesday. The inflation data will be followed by the interest rate decision from the BoE, which will be announced next Friday.

Daily Digest Market Movers: Pound Sterling capitalizes on mild correction in US Dollar

• Pound Sterling discovers interim support near the round-level cushion of 1.2400 as investors start digesting the consequences of higher interest rates by the Bank of England amid the battle against stubborn inflation.
• UK labor market slowed down and the economy contracts at a sharp pace in July as firms avoid banking on higher inventories and larger labor forces amid a deteriorating demand environment.
• UK firms focus on cutting input and labor costs to address bulky interest obligations due to rising mortgage costs.
• British job market witnessed a reduction in labor for the second straight month. In July, lay-offs were recorded at 207K, while investors anticipated a retrenchment of 185K.
• UK monthly Gross Domestic Product (GDP) for July shrank by half a percent, contributed to majorly by service output, which dropped by 0.5%.
• Monthly Industrial Production contracted by -0.7%, which was a higher pace than expectations of -0.6%. In June, the economic indicator expanded by 1.8%. In a similar period, Manufacturing Production contracted by -0.8%, a slower pace vs. expectations of a 1.0% contraction.
• In spite of a drawdown in the job market and deepening fears of an economic slowdown, higher inflationary pressures are going to force the BoE to raise interest rates further.
• Strong wage growth momentum is the major catalyst behind a persistent inflation outlook. Three months to July Average Earnings excluding bonuses remained in line with estimates and the former figure at 7.8%.
• A Reuters poll showed that the BoE is going to raise interest rates by 25 basis points (bps) to 5.50% in its upcoming monetary decision, which is scheduled for September 21. A minority of BoE policymakers would favor keeping doors open for further policy tightening.
• The uncertainty over the interest rate outlook remains higher as BoE Governor Andrew Bailey conveyed last week that the interest rate peak is near.
• Before September’s monetary policy, investors await the inflation data for August, which will be published on Wednesday.
• Any surprise rise in inflation would dampen the UK’s economic outlook further.
• Meanwhile, the risk appetite of market participants improved nominally as investors shrugged off risks associated with a global economic slowdown. The market mood turned cheerful as China’s Industrial Production and Retail Sales grew at a faster pace in August.
• The US Dollar Index (DXY) witnessed some profit-booking after a refreshing six-month high at 105.44. The upside bias is still upbeat as strong monthly Retail Sales data for August propelled consumer inflation expectations.
• Consumer spending expanded at a higher pace of 0.6% vs. estimates of 0.2% and July’s reading of 0.5%, driven by higher gasoline prices.
• Meanwhile, weekly Jobless Claims remained higher than the prior week's figures after declining straight for five weeks. Individuals claiming jobless benefits for the first time rose by 220K, while investors anticipated higher jobless claims at 225K. In the previous week, jobless benefits were recorded at 216K.

Technical Analysis: Pound Sterling attempts recovery from 1.2400

Pound Sterling rebounds after discovering a cushion near 1.2400 as the risk-aversion theme eases. The recovery move in the Cable is backed by a sell-off in the US Dollar. The absence of supportive fundamentals could fade and invite investors to use the pullback move as a selling opportunity.  The asset seems settled below the 200-day Exponential Moving Average (EMA), which trades around 1.2480.