Pound Sterling volatility squeezes amid uncertainty over interest rate outlook

• Pound Sterling finds an intermediate support, but the downside seems favored amid global uncertainty.
• BoE Dhingra warned that further tightening could hurt the UK economy.
• Investors shift focus to the July Employment data, which will be released on Tuesday.

The Pound Sterling (GBP) discovered intermediate support as investors started digesting the potential risks of global economic turmoil due to restrictive monetary policy by Western central bankers. The GBP/USD pair finds an intermediate cushion, but the broader bias remains bearish as investors expect that policy divergence between the Federal Reserve (Fed) and the Bank of England (BoE) may not vanish this month.

BoE policymaker Swati Dhingra warned that current monetary policy is “sufficiently restrictive” and that more hikes could hurt the UK economy. The narrative of keeping interest rates steady in coming months got support from BoE Governor Andrew Bailey, who conveyed that the interest rate peak is near. Higher wage growth due to labor shortages has been a driving factor in stubborn UK inflation. Therefore, investors would shift focus to the Employment report for July, which will be published on Tuesday.

Daily Digest Market Movers: Pound Sterling remains under pressure due to subdued US Dollar

• Pound Sterling rebounds after a three-day losing spell near 1.2440 as investors digest potential risks of global economic turmoil.
• The asset attempts to climb above the psychological resistance of 1.2500 as the appeal for risk-sensitive currencies improves.
• Recovery in the Pound Sterling is not backed by supportive fundamentals. Therefore, the market mood could dampen again as repercussions of the tight interest rate policy will keep threatening the economic outlook.
• Potential risks of economic turmoil in the UK region increase as the service sector contracts for the first time in the past seven months, while the Manufacturing PMI has remained below the 50.0 threshold for a lengthy period.
• Bank of England policymaker Swati Dhingra said this week that further policy tightening would hurt the economy.
• While UK economic prospects start faltering due to restrictive monetary policy, a compelling reason to halt rate hikes, solid wage growth is still a concern for the central bank.
• Wage growth momentum is swift due to labor shortages, leaving more money in the palms of households for disposal. This could back higher consumer spending momentum and eventually would result in stubborn inflation.
• BoE Governor Andrew Bailey also commented this week that the central bank is near to pausing its tightening cycle, but interest rates will remain higher for a longer period.
• A monthly survey conducted by the Bank of England (BoE) Decision Maker Panel (DMP) showed that UK businesses reported year-ahead Consumer Price Index (CPI) inflation sharply lower at 4.8% in August vs. 5.4% projected in July. UK businesses see August year-ahead wage growth at 5.0% vs. July 5.0%.
• Meanwhile, the Recruitment & Employment Confederation (REC) reported on Thursday that permanent staff placement dropped to 38.9, the lowest since June 2020.
• For an in-depth understanding of current labor market conditions, investors will focus on the July Employment report, which will be published next Tuesday, September 12,  at 06:00 GMT.
• The recovery attempt by the GBP/USD pair is also backed by exhaustion in the US Dollar’s upside momentum. The US Dollar Index (DXY) finds an intermediate resistance near 105.00, while the upside bias is still solid.
• The US Dollar faces some pressure as Federal Reserve (Fed) policymakers delivered a neutral commentary about September's monetary policy.
• Dallas Fed Bank President Lorie Logan said on Thursday that while it "could be appropriate" to skip an interest rate increase at September’s meeting but warned that more tightening may be needed to bring down inflation to 2% in a timely way.
• Chicago Fed Bank President Austan Goolsbee said the central bank is aiming to push the economy on a “global path”. This would mean a situation where inflation recedes without pushing the economy into a recession.

Technical Analysis: Pound Sterling remains sideways around 1.2500

Pound Sterling attempts a recovery on Friday after a three-day negative closing spell as investors start digesting fears of global uncertainty. The broader downside of the Cable remains weak as it is struggling to remain above the 200-day Exponential Moving Average (EMA), which is around 1.2500. The 20 and 50-day EMAs have started declining, indicating strength in Cable bears’s determination. Momentum oscillators indicate that the bearish impulse has firmed significantly.