Pound Sterling soars as investors ignore upbeat US NFP data

• The Pound Sterling recovers sharply after the release of the upbeat US Nonfarm Payrolls data.
• While the UK manufacturing sector continues to face pressure, the services sector outperformed in December, according to PMI figures.
• A mild recession in the UK economy is highly likely.

The Pound Sterling (GBP) advances strongly against the US Dollar as markets’ risk appetite has improved despite the release of the upbeat US economic data. The GBP/USD pair has strengthened despite all components of the United States Nonfarm Payrolls data for December has outperformed expectations. It seems that a robust labor demand in the US economy was already discounted by the market participants.

While Pound Sterling could lose its firm-footing as investors see tough decisions ahead for Bank of England (BoE) policymakers, who are stuck between deepening recession risks in the UK economy and high underlying inflation.

The likelihood of a technical recession in the UK economy is high as it contracted in the third quarter and a stagnant performance is anticipated for the final quarter. Also, recent PMI data signaled that the manufacturing sector continues to face pain due to high interest rates. The outlook for the GBP/USD pair has dampened as US employment indicators may reshape guidance on interest rates by the Federal Reserve (Fed).

Daily Digest Market Movers: Pound Sterling strengthens while US Dollar falls 

• The Pound Sterling delivers a strong recovery despite the United States official Employment data for December turns out stronger-than-projected.
• US employers added 216K workers against the 199K jobs created in November while investors saw moderate job gains in December.
• The Unemployment Rate remains unchanged at 3.7% against expectations of a slight rise to 3.8%.
• Average Hourly Earnings grew at a steady apce of 0.4%. The annual wage growth was 4.1% against prior rise of 4.0%. Investors forecasted labor cost data softeneing to 3.9%.
• Bets in favour of a rate cut by the Federal Reserve in March have de-escalated sharply.
• The US Dollar Index (DXY) has fallen sharply ater registering a fresh three-week high at 103.00.
• Meanwhile, the Pound Sterling remains on the back foot as investors anticipate a mild recession in the United Kingdom. The country’s economy shrank by 0.1% in the third quarter of 2023.
• Bank of England policymakers remain on a balancing act as an early rate cut decision to skirt a recession could fuel inflationary pressures.
• While the UK’s manufacturing sector continues to remain in a contraction phase due to tough conditions in the domestic and overseas markets, the Services PMI – which gauges activity in the services sector – expanded at the fastest pace since June. 
• S&P Global reported on Thursday that the Services PMI rose to 53.4 in December against expectations of 52.7 and the former reading of 50.9.
• A significant rise in client demand on hopes of lower borrowing costs and economic recovery in 2024 accelerated growth in service activities, S&P Global said.

Technical Analysis: Pound Sterling recaptures 1.2700

The Pound Sterling has rebounded to near the round-level resistance of 1.2720 as the risk-appetite of the amrket participants has improved. The GBP/USD pair recovers after discovering strong buying interest near 1.2625. However a head and shoulder chart pattern is forming on an intraday timeframe. A breakdown of the pattern would result in a fresh downside move towards the three-week low of 1.2500. 

Broader strength in the GBP/USD pair has started fading as it is struggling to sustain above the 20-day Exponential Moving Average (EMA) at 1.2660. Momentum oscillators indicate a sideways performance ahead.