GBP/USD surpasses 1.2150 despite Fed sees hawkish policy continuation into 2024

GBP/USD has overstepped the critical resistance of 1.2150 in the early European session. The Cable may need significant bids to extend its upside journey further as upside bias gets trimmed after a firmer rally. Odds are favoring further upside in the Pound Sterling as the market sentiment is extremely positive after a downbeat release of the Average Hourly Earnings followed by weaker-than-projected United States ISM Services PMI data.

Meanwhile, S&P500 futures are adding further gains after a stalwart rally on Friday, portraying that bulls are not out of steam yet. US equities snapped their 10-day subdued performance and jumped heavily after weak economic data. The US Dollar Index (DXY) is looking for an immediate cushion after a sheer fall. The USD Index is likely to test a six-month low of around 103.00, considering the bearish momentum in the asset. Also, the 10-year US Treasury yields slipped to near 3.56%.

Weaker United States PMI triggers recession fears

A slowdown in an economy is favorable for a decline in inflationary pressures but also fired up recession fears too. After recording a fresh low Manufacturing PMI figure since May 2000, reported by the United States Institute of Supply Management (ISM) department, Services PMI has also been released poor-than-projected. The Services PMI plunged significantly to 49.6 vs. the projection of 55.0. Also, New Orders Index that displays forward demand dropped massively to 45.2 vs. the expectations of 58.5. A sheer slowdown in economic activities and its forward projections are impacting the US Dollar.

No doubt, the decline in the United States' economic activities is sponsored by the higher interest rate of the Federal Reserve (Fed). This has triggered a risk of recession in the United States economy. There is no denying the fact that the Federal Reserve would look for decelerating its policy-tightening pace further. However, the continuation of higher interest rates will remain intact as the road to 2% inflation is yet to see significant obstacles.

Ambiguity escalates as wage inflation drops and NFP soars

Employment data released on Friday has created ambiguity among the sentiment of the market participants. The United States Nonfarm Payrolls (NFP) (Dec) data soared to 223K vs. the consensus of 200K. Usually, resilient demand for labor is addressed by higher earnings as firms offer more wages to bring talent in-house. Contrary, the Average Hourly Earnings dropped to 4.6% vs. the expectations of 5.0% and the prior release of 4.8%. This might result in smaller rate hikes by the Federal Reserve in the coming months.

Chicago Fed President Evans quoted in Wall Street Journal (WSJ), “It was possible the economic data would support raising the policy rate by 25 basis points at the Fed's next gathering” as reported by Reuters.

However, the continuation of a higher terminal rate for a longer period is still in the picture, citing the stubbornness of the Consumer Price Index (CPI).

Atlanta Fed Bank President warned that "The US economy is definitely slowing" led by a significant reduction in activities in housing and other interest rate sectors. On policy rate projections, the Federal Reserve policymaker sees a terminal rate above 5% and a continuation of peak policy rates into CY2024.

United Kingdom energy inflation is substitution with other categories

The price cap levied by the United Kingdom administration on energy prices to support households has mechanically reduced inflation but is impacting the prices of other products. Bank of England (BOE) policymaker Catherine Mann cited that “The cap on energy prices allows for a restructuring of spending in the rest of the consumption basket and thus potentially higher inflation in the case of all other products,” Mann said. “It’s something we watch carefully” as reported by Bloomberg. He is worried that inflation could rebound in the case the price cap on energy prices will be rolled back.

GBP/USD technical outlook

GBP/USD has delivered a break above the horizontal resistance plotted from December 27 high around 1.2112, which has become support now for the Pound Sterling. The 20-and 50-period Exponential Moving Averages (EMAs) are on the verge of delivering a bull cross around 1.2038, which will add to the upside filters.

Meanwhile, the Relative Strength Index (RSI) (14) is on the edge of shifting into the bullish range of 60.00-80.00, which will trigger the bullish momentum.