Pound Sterling plunges as consequences of higher interest rates widen

• Pound Sterling refreshes 11-week low as higher interest rates dampen economic prospects.
• UK construction firms go out of business due to stubborn cost inflation.
• The Jackson Hole Symposium will drive further price action in the FX domain.

The Pound Sterling (GBP) faces an intense sell-off due to the widening consequences of a historically aggressive rate-tightening cycle by the Bank of England (BoE). The GBP/USD prints a fresh 11-week low amid bearish market sentiment and rising risks of a recession in the UK economy. In the battle against stubborn inflation, the BoE has raised interest rates to 5.25%, the consequences of which are impacting UK corporations, forcing some to report insolvency due to their inability to cover interest obligations.

The UK’s persistent Consumer Price Index (CPI) inflation and eventually declining real income of households have resulted in weaker Retail Sales, portraying a bleak demand environment. This has compelled firms to operate at lower capacity. Market participants expect that the consequences of higher interest rates by the BoE will expand further as the central bank prepares to tighten monetary policy further in September.

Daily Digest Market Movers: Pound Sterling dives after hawkish Fed commentary

• Pound Sterling refreshes 11-week low near 1.2550 as market sentiment remains bearish with rising expectations that the UK economy is set to shrink.
• The current tightening cycle by the Bank of England is historically aggressive, and the UK economy is facing its consequences.
• This week, S&P Global reported preliminary UK Manufacturing PMI for August that dropped significantly to 42.5 from estimates of 45.0 and July’s reading of 45.3. This has been the lowest factory data figure since the pandemic period.
• Also, Services PMI shifted into the contraction phase, remaining below the 50.0 threshold. The economic data landed at 48.7, lower than estimates of 50.8 and July’s release of 51.3. This indicates that firms are underutilizing their entire capacity due to risks of deteriorating demand propelled by rising price pressures.
• The odds of UK firms announcing corporate default have risen amid their inability to obligate rising borrowing costs. A survey from the BoE shows that the share of non-financial UK companies experiencing a weak debt-service coverage ratio will rise to 50% by year-end from last year’s reading of 45%.
• UK’s Confederation of Business Industry (CBI) reported on Thursday that the monthly balance of retail sales fell to -44 in August from -25 in July. This was the biggest decline since March 2021. UK retailers are less interested in making fresh investments next year, said CBI economist Martin Sartorius.
• British construction companies have gone out of business at the highest rate in a decade as home building slowed down and government projects were delayed due to stubborn core inflation. UK authority’s Insolvency Service shows about 4,280 operators became insolvent in the past year through June.
• In spite of rising recession risks, the BoE cannot pause the rate-tightening spell as current inflationary pressures are excessively higher than the desired rate of 2%.
• Investors are now expecting that the BoE will raise interest rates by 25 basis points (bps) in September and interest rates will peak around 5.75% against the former projection of 6.0%.
• Meanwhile, British energy regulator Ofgem has come forward to provide some relief to UK households by lowering its price cap on household energy bills.  The cap was lowered to an annual level of GBP 1,923 for a typical dual-fuel household, compared with July’s price reduction of GBP 2,074. “The drop will save households an average of GBP 151 compared with the previous quarter,” the UK regulator said.
• On Monday, UK markets will remain closed due to the summer bank holiday.
• Market sentiment is bearish as Federal Reserve (Fed) Chair Jerome Powell delivers a hawkish commentary at the Jackson Hole Symposium. Fed Powell conveys that more interest rate hikes could be announced if the economic data remains encouraging. 
• Jerome Powell strongly emphasized keeping interest rates restrictive till inflation sustainably moves down to 2%.
• About inflation status, Jerome Powell said "Inflation remains too high, the process of bringing down inflation still has a long way to go, even with more favorable recent readings."
• The US Dollar Index (DXY) confidently climbs above the 104.00 resistance as fears of a slowdown in China deepen due to rising deflation risks. Also, 10-year US Treasury yields rebounded to 4.25%.

Technical Analysis: Pound Sterling prints a fresh from 11-week low

Pound Sterling prints a fresh 11-week low near 1.2550. The Cable witnessed immense selling pressure after a breakdown of the crucial support at 1.2615. More downside in the major is expected as the 20 and 50-day Exponential Moving Averages (EMAs) delivered a bearish crossover. The Cable is expected to extend its downside toward the 200-day EMA, which currently trades at 1.2480. Momentum oscillators indicate that the bearish impulse has been triggered.