- GBP/USD has declined sharply after having tested 1.2600.
- UK PMI data reminded investors of the recession risks in the UK.
- Sellers could retain control if the pair fails to reclaim 1.2500.
GBP/USD has reversed its direction in the European session on Tuesday and dropped below 1.2500, erasing the majority of the gains it registered on Monday. The data from the UK reminded investors of the recession risks in the UK and weighed heavily on the British pound.
The S&P/CIPS Services PMI in May plunged to 51.8 in May's flash estimate from 58.9 in April. This print missed the market expectation of 57.3 by a wide margin. Similarly, the Manufacturing PMI dropped to 54.6 from 55.8 in the same period. Although these figures suggest that the business activity continued to expand at a modest pace in May, the loss of growth momentum is a significant warning sign.
Commenting on the data, "the UK PMI survey data signal a severe slowing in the rate of economic growth in May, with forward-looking indicators hinting that worse is to come," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. "Meanwhile, the inflation picture has worsened as the rate of increase of companies' costs hit yet another all-time high."
Bank of England (BoE) Governor Andrew Bailey said on Monday that they are prepared to raise the policy rate again if needed but acknowledged that tightening must take income shock into account. Duncan Brock, Group Director at CIPS, noted that the squeeze on household incomes could further hurt the service sector with consumers reacting to rising energy, food and fuel costs.
Following the dismal PMI surveys, investors are reassessing the BOE's tightening prospects and making it difficult for GBP/USD to hold its ground.
Later in the session, the PMI data from the US will be watched closely by market participants. In case these data highlight the diverging US-UK economic outlook, GBP/USD could extend its slide.
GBP/USD Technical Analysis
The ascending trend line coming from mid-May stays intact despite the latest decline and forms significant support at 1.2500. With a four-hour close below that level, the pair could push lower toward 1.2450 (static level) and 1.2400 (psychological level, 100-period and 50-period SMAs on the four-hour chart).
On the other hand, 1.2530 (20-period SMA) aligns as interim resistance ahead of 1.2560 (static level) and 1.2600 (psychological level, daily high).
Meanwhile, the Relative Strength Index (RSI) indicator is holding near 50. In case the RSI falls below 50 with the pair closing below 1.2500, that could be seen a confirmation of the bearish shift in the near-term outlook.
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