Pound Sterling extends upside despite deepening UK recession fears

The Pound Sterling (GBP) aims for a breakout of volatility contraction amid downbeat US Dollar. The GBP/USD pair remains broadly upbeat as investors hope that the Bank of England (BoE) will start its rate-cut campaign later than the Federal Reserve (Fed) as inflationary pressures in the United States are in a clear downtrend.

Investors continue to channelize liquidity into the Pound Sterling despite deepening fears of a recession in the United Kingdom economy. As per the latest estimates, the British economy contracted by 0.1% in the July-September period. According to the latest projections from the BoE, the economy is expected to remain stagnant in the last quarter this year. The UK economy would be in a technical recession if it contracts again.

Daily Digest Market Movers: Pound Sterling remains upbeat while USD Index extends losses

• Pound Sterling strengthens against the US Dollar as easing price pressures in the United States economy have fuelled bets for early rate cuts by the Federal Reserve in 2024.
• The Pound Sterling clings to gains, benefitting from the upbeat Retail Sales data for November due to robust sales at non-food retail stores.
• Higher discounts by non-food retail stores amid Black Friday sales led to a robust increment in consumer spending.
• Monthly Retail Sales recorded a higher 1.3% against the consensus of 0.4% and a stagnant performance in October. Surprisingly, annual sales at retail stores were up by 0.1% while investors forecasted a contraction by 1.3%.
• The Pound Sterling continues to hold gains tightly despite deepening fears of a recession in the United Kingdom.
• The UK Office for National Statistics (ONS), in its revised estimates, revealed a contraction in the economy of 0.1% in the third quarter of 2023. Earlier, it anticipated a stagnant performance in the same period.
• Meanwhile, the Bank of England, in its latest projections, indicated that the economy would remain stagnant in the final quarter of this year. 
• Last week, the UK’s Finance Minister, the Chancellor of the Exchequer Jeremy Hunt said there is a reasonable chance that the central bank may decide to reduce interest rates if we stay on course and manage to bring down inflation.
• On the contrary, BoE policymakers have been stating interest rate cuts would be “premature” in spite of a significant fall in the price index. Stronger wage growth is dampening confidence that inflation is clearly in a downtrend.
• Last week, Barclays said that the BoE may initiate its rate cut campaign from May, when it was previously expected from August.
• Major factors that are fueling early rate-cut hopes are expectations of a recession in the UK economy and the rare step of the  Chancellor Jeremy Hunt suggesting the central bank make rate cuts to boost growth.
• Going forward, the market mood is expected to remain quite amid a holiday-truncated week.
• The US Dollar Index (DXY) trades near five-month low around 101.46 as a more-than-anticipated decline in the core Personal Consumption Expenditure price index (PCE) for November has pumped bets in favour of early rate cuts by the Fed.
• Monthly US core PCE data grew slightly by 0.1% while investors projected a growth rate of 0.2% as recorded for October. On an annualized basis, the underlying inflation has decelerated to 3.2% vs. the consensus of 3.3% and the former reading of 3.5%.
• Investors should note that the Federal Reserve (Fed), in its Summary of Projections (SOP) released last week, forecasted core PCE at 3.2% by the year-end.

Technical Analysis: Pound Sterling advances toward 1.2800

Pound Sterling approaches the immediate resistance of 1.2800, being supported by a risk-on mood. The GBP/USD pair demonstrates a Symmetrical Triangle chart pattern formation on an intraday time frame amid the festive season. The formation of the aforementioned chart pattern indicates a sheer contraction in volatility.

On a daily time frame, the Cable is being consistently supported by upward-sloping 20-day Exponential Moving Average (EMA), which trades around 1.2630.

The Relative Strength index (RSI) (14) is on the verge of breaking above 60.00. A bullish momentum would trigger if the RSI manages to do so.