Pound Sterling consolidates amid uncertainty over interest rate peak

Share:

• Pound Sterling attempts recovery from below 1.2600 but still remains fragile as factory activities weaken further.
• UK factory activities dropped to 43.0, the lowest reading in the past 39 months.
• The BoE is expected to raise interest rates consecutive for the 15^th time this month.

The Pound Sterling (GBP) strives for a meaningful recovery after an intense sell-off, which was propelled by deepening recession risks. The recovery attempt by the GBP/USD pair seems delicate as UK factory activities face the wrath of higher interest rates by the Bank of England (BoE). Britain firms have shifted their focus on stabilizing margins and easing cost pressures by cutting inventories and the labor force. Going forward, transferring the benefit of easing cost pressures from firms to the end-consumer might ease inflationary pressures on households.

In spite of deepening recession fears, the BoE cannot pause the policy tightening spell as the core Consumer Price Index (CPI) is pretty close to its all-time peak of 7.1%, and the decline in the headline inflation is lower in comparison with the softening pace of energy prices. Meanwhile, UK FM Jeremy Hunt is confident that UK inflation will halve from January levels near 10% by year-end.

Daily Digest Market Movers: Pound Sterling awaits Services PMI

• Pound Sterling discovers intermediate cushion after a vertical sell-off move below the round-level support of 1.2600 as investors shift focus to the interest rate outlook.
• Investors keep guessing about the interest rate decision from the Bank of England to be taken this month as higher interest rates dampen the economic outlook.
• S&P Global reported on Friday that the UK factory PMI for August dropped to 43.0 vs. July’s reading of 45.3. The reading was above the estimates of 42.5 but was the lowest one in more than three years.
• UK’s Manufacturing PMI remained below the 50.0 threshold for the 13th month in a row, denoting de-growth in activity as firms operate on leaner capacity and in an efficient manner to avoid cost pressures.
• Rob Dobson, director at S&P Global Market Intelligence, said output and new orders in the factory sector contracted at rates rarely seen outside of crisis periods, and companies were being forced into defensive action.
• UK firms are cutting purchasing inputs and their laborforce to stabilize margins and control costs.
• S&P Global Manufacturing report stated that input costs eased at the quickest pace since January, which would ease inflation in upcoming months as firms might pass on the benefit of low input costs to end consumers.
• In spite of the deepening risk of a recession, the BoE is expected to raise interest rates further as core inflation is so close to its all-time peak of 7.1%.
• The BoE is expected to raise interest rates by 25 basis points (bps) to 5.50% at its September monetary policy meeting. This would be the 15th straight interest rate hike by the central bank.
• 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.
• UK authority’s focus on halving inflation is expected to disappoint members of the ruling Conservative Party who lobbied heavily for tax cuts before elections.
• The market mood remains cautious as the US Dollar keeps attracting funds after stable hiring momentum offset a higher jobless rate in August.
• The US Bureau of Labor Statistics reported that the Unemployment Rate for August jumped sharply to 3.8% against estimates and the former release of 3.5%. Fresh Nonfarm Payrolls (NFP) were 187K, higher than expectations of 170K and July’s reading of 157K.
• Wage growth continues to expand but at a slower growth rate. Average Hourly Earnings expanded at a slower pace of 0.2% than the expected pace of 0.3%. Slower wage growth could ease consumer spending momentum and some heat in inflationary pressures.
• In spite of the restrictive monetary policy by the Federal Reserve (Fed), the Manufacturing PMI reported by the Institute of Supply Management (ISM) increased to 47.6 last month from 46.4 in July. However, factory PMI remained below the 50.0 mark, which itself shows a contraction in activities.

Technical Analysis: Pound Sterling shifts action above 1.2600

Pound Sterling attempts to recapture the round-level resistance of 1.2600 as the US Dollar faces a gradual correction. The Cable witnessed an intense sell-off on Friday after a breakdown of two-day consolidation formed in the 1.2648-1.2745 range. 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.