Pound Sterling rebounds as consumer spending improves

• Pound Sterling struggles to extend recovery as the BoE warns risk of a potential slowdown.
• The UK economy is seen slowing down as firms restrict themselves from adding operating capacity and labor.
• On Thursday, the BoE kept room open for further policy tightening if inflationary pressures remained persistent.

The Pound Sterling (GBP) finds offers while attempting to extend recovery as investors see no change in the current policy divergence between the Federal Reserve and the Bank of England (BoE). The GBP/USD pair looks set to test its six-month low as BoE policymakers have shifted their focus to safeguarding the economy from recession risks.

Meanwhile, S&P Global reported a mixed preliminary PMI report for September. The Manufacturing PMI improved to 44.2 vs. expectations and the former release of 43.0. Services PMI landed at 47.2 below the consensus of 49.2 and August's reading of 49.5. The economic data landed below the 50.0 figure consecutively for the second time, signaling contraction in economic activities.

The UK economy has been through a vulnerable phase as the BoE was consistently raising interest rates so that inflationary pressure above the desired rate could recede. While the BoE still cannot announce a victory over inflation as it is more than three times the desired rate, the UK’s economic outlook has worsened as firms are operating at lower capacity and labor growth has slowed.

Daily Digest Market Movers: Pound Sterling attempts recovery as Retail Sales improve

• Pound Sterling faces selling pressure after a pullback move to near the round-level resistance of 1.2300 as investors expect Fed-BoE policy divergence to become sustained.
• The BoE paused its lengthy policy tightening cycle on Thursday as policymakers shifted their focus to recession risks propelled by worsening economic prospects caused by higher interest rates.
• UK central bank held interest rates steady after raising them 15 times straight since December 2021 to ensure price stability.
• A pause in the rate-tightening spell is going to provide relief to households that were facing trouble in augmenting their installment obligations due to higher interest rates.
• The BoE maintained the status quo after Governor Andrew Bailey, policymakers Broadbent, Dhingra, Pill, and Ramsden voted to hold, while Cunliffe, Greene, Haskel, and Mann wanted to lift the key rate to 5.5%.
• However, the BoE kept room open for further policy tightening if inflationary pressure remains persistent.
• This week, UK inflation for August remained soft despite rising energy prices. Monthly headline inflation expanded at a slower pace of 0.3%, while investors anticipated it accelerating at a pace of 0.7%. In July, the economic data contracted by 0.4%.
• On annual terms, the headline CPI softened to 6.7% vs. July’s reading of 6.8%. The core CPI that excludes volatile food and oil prices softened significantly to 6.2% against the estimates of 6.8% and the 6.9% figure recorded in July.
• After UK inflation data, Chancellor Jeremy Hunt said the soft inflation report indicates that “the plan to deal with inflation is working – plain and simple.” He further added that inflation would be halved to 5.3% by year-end if the authorities stick to their plan.
• BoE policymakers warned that interest rates will remain lofty “long enough” to bring down inflation to target.
• About the economic outlook, the BoE conveyed that Q3 Gross Domestic Product (GDP) now is expected to rise 0.1% (Aug: +0.4%), with underlying growth in H2 2023 likely weaker than forecast in August.
• Meanwhile, the UK’s Office for National Statistics (ONS) has reported slightly weaker Retail Sales for August. On a monthly basis, consumer spending rose by 0.4% vs. expectations of 0.5%. In July, Retail Sales contracted by 1.1%. While the economic data excluding fuel prices matched expectations at 0.6%.
• The market mood remains cautious as the Federal Reserve stressed keeping interest rates sufficiently high for a longer time to ensure price stability.
• The US Dollar Index (DXY) consolidates near a six-month high around 105.70 ahead of the preliminary S&P Global Manufacturing PMI for September, which will be published at 13:45 GMT.
• Despite a pause in the rate-tightening spell by the Fed, the US Dollar is expected to remain resilient as the US economy has absorbed the consequences of higher interest rates in a better manner than other G7 economies.

Technical Analysis: Pound Sterling rebounds to near 1.2280

Pound Sterling finds sellers after a short-lived pullback move close to 1.2300. The Cable is only marginally above the six-month low around 1.2200. The asset has stabilized below all short-to-long-term daily Exponential Moving Averages (EMAs). Momentum oscillators support further weakness in the Cable.