Pound Sterling cracks on hawkish BoE bets, firm US Dollar

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• Pound Sterling resumes its upside journey as market mood turns upbeat after US job data.
• 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) weakens as market sentiment turns bearish and investors see a higher interest rate peak from the Bank of England (BoE). The GBP/USD discovered selling interest 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%. Also, a strong recovery in the US Dollar Index after US NFP and Manufacturing PMI reports have built selling pressure on the GBP/USD pair.

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 weakens as US Dollar roars

• 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 as US Nonfarm Payrolls (NFP) remained mixed. 
• 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.
• Hopes of a pause in the policy tightening spell by the Federal Reserve improve as the US labor market loses appeal.
• 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.
• The US Dollar Index (DXY) jumps to near 103.50 after upbeat ISM Manufacturing PMI for August. US factory activities rose to 47.6 vs. expectations of 47.0 and the former release of 46.4. New Orders also outperformed expectations, landing at 46.8 vs. estimates of 46.3 but lower than July’s print of 47.3. Manufacturing PMI remains below the 50.0 threshold suggesting a contraction in activity, straight for the ninth month.