Pound Sterling recovery falters on weak UK PMI, US Dollar recovers

• Pound Sterling extends downside on vulnerable UK PMI data.
• The UK ONS reported that the labor force shed jobs for the third time in a row.
• The BoE is expected to leave interest rates unchanged next week.

The Pound Sterling (GBP) faces some sell-off in an attempt to capture the crucial resistance of 1.2300. It seems merely a correction as more upside seems possible amid improved market sentiment and better-than-anticipated employment data. The UK Office for National Statistics (ONS) reported that the labor market shed jobs for the third time in a row in the quarter to August, but the number of jobs lost was lower than expected. Moreover, the Unemployment Rate fell and remained below the expectations, indicating stable labor market conditions.

Labor demand in the UK has slowed significantly due to the deteriorating demand environment amid higher borrowing costs by the Bank of England (BoE), which has been raising interest rates sharply in an attempt to bring down consumer inflation to 2%. Investors shift their focus towards the next BoE’s interest rate decision, which will be announced on November 2. The  BoE is expected to keep interest rates steady at 5.25% as weakening signs for the economy mount.

Daily Digest Market Movers: Pound Sterling weakens as US Dollar, yields revive

• Pound Sterling faced an intense sell-off as the labor market squeezed for the third month in a row and business activity remained in the contracting phase.
• The UK ONS reported that employers shed 82K jobs in the June-August period, which was significantly lower than expectations of 198K lay-offs. In the three months to July period, employment declined by 207K.
• Consistently declining laborforce indicates that firms have cut on workforce due to poor demand.
• The Unemployment Rate dropped to 4.2% in the three months to August, against expectations and the former reading of 4.3%.
• In September, the Claimant Count Change rose 20.4K while economists projected a marginal increase of 2.3K. In August, individuals claiming jobless benefits were 0.9K.
• The release of the mix of US S&P Global preliminary PMI data for October has also built some pressure on the Pound Sterling. The Manufacturing PMI at 45.2, outperformed expectations and the former reading of 45.0 and 44.3 respectively. The Services PMI at 49.2, remained below the expectations of 49.5, and September's release of 49.3.
• The labor market data was expected last week but the Labour Force Survey (LFS) said that responses were inconsistent in comparison with tax data and surveys of employers.
• Investors should be aware of the fact that the Employment Change and the Unemployment data are experimental adjusted estimates as the usual data collected by the LFS was hampered due to low response rates.
• According to a poll conducted by Reuters, the Bank of England is expected to hold interest rates unchanged at 5.25% on November 2.
• The absence of supportive economic indicators and the confidence of BoE Governor Andrew Bailey that inflation will have a marked fall next month could allow policymakers to leave interest rates unchanged.
• The UK Manufacturing and Services PMI is below the 50.0 threshold, labor demand has slowed and Retail Sales contracted, signaling weak economic activity and likely denting consumer inflation expectations.
• The broader market mood remains downbeat amid Middle East tensions. The Israeli military troops are planning for the ground assault in Gaza to dismantle Hamas. Gaza health authorities reported 5,000 deaths and more than 15,000 civilians wounded.
• The GBP/USD pair recovered strongly on Monday after the US Dollar Index (DXY) faced a sell-off. The USD Index dropped sharply to near 105.50 as long-term US Bond yields edged lower from a multi-year high above 5%.
• The 10-year US Treasury yields drop ahead of upcoming key US economic data to be released later this week. Investors keenly await Q3 Gross Domestic Product (GDP), Federal Reserve's (Fed) preferred inflation gauge, and Durable Goods Orders data.
• Investors seem worried about deteriorating financial conditions due to higher yields and Middle East tensions as they could trigger a slowdown in the US economy.

Technical Analysis: Pound Sterling skids below 1.2200

Pound Sterling dropped after printing a fresh weekly high around 1.2280 amid a risk-on mood. The Cable attracted significant bids after a breakout of the consolidation formed in a range of 1.2100-1.2230. The GBP/USD pair climbs above the 20-day Exponential Moving Average (EMA), which indicates that the short-term trend has turned bullish. While the broader GBP/USD outlook is still bearish due to a death cross signal by the 50-day and 200-day EMAs.