Pound Sterling tumbles as BoE seems unwilling to raise interest rates further

• Pound Sterling cracks as BoE policymakers see current monetary policy as sufficiently restrictive.
• After a series of contracting factory activities, the UK service sector shrunk for the first time since January.
• Market sentiment remains dampened as investors worry about global recession fears.

The Pound Sterling (GBP) drops below the psychological support of 1.2500 after facing intense selling pressure post-speech from Bank of England (BoE) Governor Andrew Bailey and policymaker Swati Dhingra. BoE Bailey cited that the central bank is not clear about raising interest rates further. The central bank is expected to remain data-dependent while BoE Dhingra said that current monetary policy is sufficiently restrictive.

Earlier, the GBP/USD pair remained vulnerable after S&P Global reported that the United Kingdom’s service sector started shrinking due to infirm demand from households and the private sector amid a high-interest rate environment and the overall market sentiment is bearish.

The UK’s economy is expected to weaken further as the Bank of England (BoE) is preparing to raise interest rates further to sharpen monetary tools against a persistently high core Consumer Price Index (CPI). Investors anticipate a quarter-to-a-basis interest rate hike from the BoE on September 21, which will push interest rates to 5.50%. Meanwhile, investors await the S&P Global Construction PMI for August, which will be released at 08:30 GMT.

Daily Digest Market Movers: Pound Sterling cracks after BoE Bailey speech

• Pound Sterling dropped vertically as Bank of England Governor Andrew Bailey remains uncertain about further policy-tightening. BoE Bailey cited that the central bank is not clear about raising interest rates further. The central bank is expected to remain data-dependent.
• BoE policymaker Swati Dhingra said during the Monetary Policy Hearings before the UK Treasury Select Committee that current monetary policy is sufficiently restrictive.
• After declining UK factory activities, the service sector also comes under pressure as higher interest rates and rising prices ease household demand.
• Corporate demand has also dropped due to faltering economic growth and sticky inflation, weighing heavily on the economic outlook.
• S&P Global reported that the Services PMI for August dropped to 49.5 vs. July’s reading of 51.5 but remained higher than estimates of 48.7. The economic data remains below the 50.0 threshold for the first time since January.
• It seems that the cooling effects of higher interest rates by the BoE are impacting the overall spending and confidence of households and corporations in the UK economy.
• Tim Moore, Economics Director at S&P Global Market Intelligence, said, "Service providers saw customer spending reverse course during August as higher borrowing costs, subdued business confidence, and stretched household finances all acted to curtail sales opportunities.
• Meanwhile, BoE policymakers are gearing up to raise interest rates straight for the 15th time to sharpen monetary tools in the battle against persistent inflation.
• The BoE will announce the monetary policy on September 21. An interest rate hike of 25 basis points (bps) is expected, which will push interest rates to 5.50%.
• Going forward, investors will focus on the S&P Global UK Construction PMI for August, which will be published at 8:30 GMT. The economic data is seen dropping to 50.7 from 51.7 in July. UK construction activities weakened as households postponed home demand to avoid higher installment obligations.
• The market sentiment remains bearish as investors remain worried about the deteriorating global outlook in the battle against stubborn inflation.
• Risk-sensitive currencies are facing repercussions of higher interest rates by their respective central banks such as economic shrinkage and slower labor growth.
• The US Dollar reported a subdued performance on Wednesday morning, but the broader bias remains bullish as US recession fears recede significantly.
• Analysts at Goldman Sachs see a 15% chance that the US economy will slide into a recession as inflation cools down and job growth remains solid. Earlier, expectations of a recession in the US economy were at 20%.
• Further action in the US Dollar will be based on the US ISM Services PMI for August, which will be published at 14:00 GMT. The PMI data is seen dropping marginally to 52.5 vs. 52.47 in July.

Technical Analysis: Pound Sterling drops below 1.2500

Pound Sterling drops below the psychological support of 1.2500 as BoE policymakers seem reluctant to raise interest rates further. The Cable remains vulnerable after stabilizing below the 20 and 50-day Exponential Moving Averages (EMAs). The asset is expected to extend its downside journey and may find an intermediate cushion near the 200-day EMA, which trades marginally below 1.2500. Momentum oscillators demonstrate that the bearish impulse is strengthening again.