Pound Sterling tumbles on stubborn inflation and poor economic outlook

• Pound Sterling faces an intense sell-off as the UK economy is exposed to a possible recession.
• The BoE seems done with hiking interest rates as UK Services PMI contracts.
• The market mood remains downbeat as central bankers are expected to keep interest rates higher for a longer period.

The Pound Sterling (GBP) remains on a bearish trajectory as investors worry about the UK’s economic outlook. The GBP/USD pair weakens further as a persistent Consumer Price Index (CPI) and a restrictive interest rate policy by the Bank of England (BoE) continue to accelerate the burden on households. The outlook for the GBP/USD pair worsened further as the UK’s Services PMI remained below the 50.0 threshold for the second straight month in September in an S&P Global preliminary PMI report.

Like the Federal Reserve (Fed), the BoE vowed to keep interest rates sufficiently high for a longer period. Unlike the US Dollar, the Pound Sterling is facing an intense sell-off as risks of a recession in the UK economy are skewed to the upside. Market participants expect UK PM Rishi Sunak to fail to keep his promise of halving inflation to 5.3% by year-end as the BoE seems done with hiking interest rates.

Daily Digest Market Movers: Pound Sterling eyes more downside amid firmer US Dollar

• Pound Sterling continues a four-day losing spell as investors rush for safe-haven assets as uncertainty over global economic prospects deepens due to persistent inflation.
• Upside risks to a slowdown in the UK economy have forced investors to dump the Pound Sterling.
• In addition to potential slowdown risks, the likelihood of a rebound in inflation has improved as the Bank of England has paused the policy-tightening spell after raising them 14 consecutive times.
• Rising energy prices due to the global oil rally could accelerate headline inflationary pressure, but their impact seems limited.
• Last week, BoE policymakers unexpectedly skipped the interest rate hike, while investors anticipated a 25 basis point (bp) rate increase. Apart from falling inflation, squeezing labor demand, and contracting Manufacturing and Services PMIs seem major factors behind a pause in the rate-tightening spell.
• A sudden pause in the BoE’s rate-hiking regime indicates that the central bank is done with hiking rates and will keep them higher long enough until the achievement of price stability.
• Unlike the resilient US Dollar, the Pound Sterling is expected to remain under pressure for a longer period. The Fed is also keeping interest rates unchanged, but their decision is backed by falling inflation and a stronger economy while the UK economy is going through a vulnerable phase.
• UK manufacturing activities have been contracting over a longer period. The Service sector has started following the footprints of factory activities and remained below the 50.0 threshold for the second time in a row.
• The release of UK Manufacturing and Services PMI below the 50.0 threshold indicates that overall economic activities are contracting, signaling a vulnerable economic outlook.
• Big Four accounting firm KPMG projected that the UK economy is set to slow in the second half of 2023 due to high-interest rates and policy uncertainty before the general elections.
• Later this week, investors will keenly watch the final April-June quarter Gross Domestic Product (GDP) numbers. The final annual GDP data is seen maintaining a steady growth rate of 0.4%.
• The market mood remains cautious as investors are worried about the global economic outlook as central bankers are expected to keep interest rates sufficiently high for a longer period.
• The US Dollar Index (DXY) prints a fresh 10-month high around 106.20 as investors see the US economy remaining resilient despite the Fed vowing to keep interest rates sufficiently restrictive until inflation comes down to 2%.
• On Monday, a hawkish commentary from Minneapolis Federal Reserve Bank President Neel Kashkari infused strength in the US Dollar and Treasury yields. Fed Governor Kashkari supports further policy-tightening by the central bank due to a resilient US economy.

Technical Analysis: Pound Sterling refreshes six-month low at 1.2170

Pound Sterling extended a four-day losing spell on Tuesday as the risk appetite of market participants weakened amid deepening UK slowdown fears. The GBP/USD pair drops below the round-level support of 1.2200, printing a fresh six-month low near 1.2170. The pair is expected to deliver more weakness. A bear cross, represented by the 20 and 200-day Exponential Moving Averages (EMAs), warrants more weakness ahead. Momentum oscillators have reached oversold levels.