Pound Sterling falls vertically as recession risks renewed, Services PMI eyed

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• Pound Sterling surrenders recovery amid cautious market mood.
• UK Hunt assured that the administration is on track to bring down inflation to almost 5% by year-end.
• Investors await S&P Global Services PMI data for a detailed status of the UK economy.

The Pound Sterling (GBP) faces immense selling pressure and will likely retest a 10-week low due to the active risk-aversion theme. The GBP/USD pair is reeling from the Bank of England’s (BoE) aggressive policy of raising interest rates, which is threatening the economic outlook. Investors believe that the global economy will shift into a recession if central banks continue to tighten monetary policy.

The UK economy is expected to remain vulnerable as the BoE could be the laggard in pausing the policy tightening spell. Britain’s Consumer Price Index (CPI) is the highest among G7 economies, which warrants more rate hikes ahead. However, UK Finance Minister Jeremy Hunt assured the public that the administration is on track to bring down inflation to almost 5% by year-end.

Daily Digest Market Movers: Pound Sterling drops as US Dollar refreshes 10-week high

• Pound Sterling struggles to sustain above the crucial support of 1.2600 as investors worry that the UK economy could shift into a recession, knowing that the Bank of England (BoE) will raise interest rates further.
• The BoE is not yet in a position to pause the policy tightening and announce a victory over persistent inflationary pressures.
• UK core inflation is close to its all-time peak of 7.1% despite the BoE having already raised interest rates to 5.25%. The headline inflation has decelerated less in response to softening energy and fuel prices.
• Market participants expect that the BoE will raise interest rates further at the September meeting. This would be the 15th straight interest rate hike in which the central bank is expected to raise rates by 25 basis points (bps) – this time to 5.50%.
• UK housing and factory activities have remained under pressure due to higher interest rates by the BoE.
• First-time home buyers postponed their investments to avoid higher interest obligations. Firms cut spending on fresh hiring and inventories in order to focus on operating efficiently in a deteriorating demand environment.
• UK Finance Minister Jeremy Hunt said over the weekend that the administration is on track to bring down inflation to almost 5% by year-end.
• British authorities’ focus on halving inflation is expected to disappoint members of the ruling Conservative Party, who lobbied heavily for tax cuts before elections.
• Barclays report on UK consumer spending showed that spending remained muted in August despite the regular public flocking to cinemas amid the release of the films Barbie and Oppenheimer.
• The report from Barclays also showed that the annual growth in consumer spending on credit and debit cards slowed to 2.8% from July’s reading of 4.0%.
• Going forward, investors will keep their eyes on the UK S&P Global Composite and Services PMI for August. The economic data is seen steady at 47.9 and 48.7, respectively. A figure below the 50.0 threshold signals a contraction in activity. The UK economy might show a monthly contraction in its service sector for the first time in six months.
• The market mood turns cautious as investors expect that higher interest rates from central banks in developed nations would be more challenging for emerging markets due to rising geopolitical fragmentation.
• The US Dollar Index (DXY) prints a fresh three-month high near 104.50 despite rising hopes of a pause in the policy tightening by the Federal Reserve (Fed).
• As per the CME FedWatch Tool, there is as much as a 60% chance that interest rates will remain unchanged at 5.25%-5.50% by year-end.
• After steady labor growth and factory activities, investors shifted their focus to the US ISM Services PMI for August, which will be released on Wednesday. The PMI is expected to be broadly steady at 52.

Technical Analysis: Pound Sterling skids below 1.2600

Pound Sterling retreats after facing selling pressure above the round-level resistance of 1.2600. The Cable drops vertically as market sentiment turns bearish. A decisive break below the September 1 low at 1.2577 will trigger a breakdown of the Inside candle chart pattern. The 20 and 50-day Exponential Moving Averages (EMAs) have already delivered a bearish crossover. The asset is declining toward the 200-day EMA, which trades below 1.2500.