Pound Sterling exposed to 1.24 as BoE sees interest rate peak near

The Pound Sterling (GBP) cracked significantly amid increasing risk-aversion and dovish remarks from Bank of England (BoE) Governor Andrew Bailey and policymaker Swati Dhingra about September’s monetary policy decision. The GBP/USD pair is expected to remain on tenterhooks as policy divergence between the BoE and the Federal Reserve (Fed) is likely to persist if the UK’s central bank decides to pause the policy-tightening spell.

Swati Dhingra said Wednesday that the current interest rate policy is sufficiently restrictive and further hikes in interest rates would make the economic outlook vulnerable. Fading consumer spending momentum and a deteriorating demand environment have started impacting the services sector, according to the latest survey data. The UK services PMI, which gauges business activity in the sector, pointed to a contraction in August for the first time since January.

Daily Digest Market Movers: Pound Sterling remains vulnerable due to risk-off mood

• The Pound Sterling oscillates below the psychological support of 1.2500 as Bank of England (BoE) Governor Andrew Bailey casts doubts over further policy tightening.
• BoE Bailey said that the central bank is closer to ending its interest-rate hiking cycle but unlikely to cut rates to ensure squeezing out inflation from the economy.
• About the inflation outlook, Bailey said that many of the indicators are moving in the right direction,  signaling that the fall in inflation will continue.
• BoE policymaker Swati Dhingra, who has been voting to keep interest rates unchanged from the past few policy meetings, said that interest rates are already at high levels and that further tightening could hurt the economy.
• The Pound Sterling came under severe pressure as expectations over policy divergence between the Fed and the BoE have increased.
• The UK economy has the highest inflation rate among the G7 economies. Commentary about a steady interest rate policy could elevate consumer inflation expectations.
• The absence of more interest rate hikes might safeguard the economic outlook from further vulnerability, but it could also mean higher inflation ahead,  further squeezing households’ real incomes.
• After vulnerable Manufacturing PMI data, a PMI index gauging the country’s services sector also slipped below the 50.0 threshold for the first time since January.
• It seems that the cooling effects of higher interest rates appear to be hitting spending and confidence from both households and corporations in the UK.
• 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.
• After Andrew Bailey’s commentary on interest rates, uncertainty over the monetary policy meeting scheduled for September 21 has increased.
• The market mood remains cautious as the global economy is exposed to higher uncertainty due to rising interest rates by Western central banks.
• The appeal for the US Dollar improves further as fears of a recession in the US economy fade.
• The US service sector turned out to be more resilient than expected in August.  The ISM reported that the Services PMI jumped to 54.5 against expectations of 52.5 and July’s reading of 52.7. The services sector accounts for two-thirds of the US economy, so an upbeat service sector indicates economic strength in spite of high-interest rates.
• The New Orders subindex for the services sector rose sharply to 57.5  from 55.0  in July, indicating strong consumer demand ahead, which would keep the economy resilient.
• On Wednesday, Boston Fed President Susan Collins said that further action on interest rates will be based on incoming data. Fed Collins expects a slowdown in the coming months and said that the central bank is far from containing inflation.

Technical Analysis: Pound Sterling juggles near 1.2450 post-breakdown

Pound Sterling extends its two-day losing streak after dropping below Wednesday’s low of 1.2480. The Cable skids below the psychological support of 1.2500 as market sentiment remains negative and the BoE seems uncertain about further policy tightening. The asset has dropped to near the 200-day Exponential Moving Average (EMA), which trades around 1.2480. Momentum oscillators also indicate that the bearish impulse has strengthened.