Pound Sterling remains delicate on sticky inflation and bleak demand outlook

The Pound Sterling (GBP) faces selling pressure as investors start worrying about the United Kingdom’s weak economic outlook and upside risks to inflation on Albion’s shores. The GBP/USD pair came under severe pressure after an unexpected pause in the policy-tightening spell by the Bank of England (BoE) last week. The GBP/USD outlook weakens as a sudden skip in the rate-tightening regime by the UK central bank against expectations of an interest rate increase signaled risks of economic slowdown.

The UK economy is seen losing strength amid uncertainty over the interest rate outlook ahead of general elections. UK PM Rishi Sunak promised to halve inflation to 5.3% by year-end, but a pause announced by BoE policymakers indicates that the authority may fail to keep the word. UK economic activities have been hit hard by higher interest rates. After contracting manufacturing activities, Services PMI also slipped below the 50.0 threshold for the second time in a row.

Daily Digest Market Movers: Pound Sterling weakens amid cautious market mood

• Pound Sterling trades marginally above a six-month low near 1.2200 as investors see the UK economy sharply slowing in the last quarter of 2023.
• Investors turned cautious about the GBP/USD outlook as the UK's consumer inflation expectations are expected to rise and prospects of economic activities seem worse due to a deteriorating demand environment.
• Inflationary pressure in the UK economy is expected to accelerate further as the Bank of England (BoE) has paused the policy-tightening spell at 5.25%, while investors projected the interest rate peak at 5.75%.
• BoE policymakers shifted focus on UK economic prospects due to slowing labor demand and contracting factory activities. For higher inflation, the BoE confirmed keeping interest rates elevated until the accomplishment of price stability.
• S&P Global reported a mixed preliminary PMI report for September. The Manufacturing PMI improved to 44.2 vs. expectations and the former release of 43.0. Services PMI landed at 47.2 below the consensus of 49.2 and August's reading of 49.5.
• UK manufacturing activities have been contracting over a longer period. The Service sector has started following the footprints of factory activities and remained below the 50.0 threshold consecutively for the second time.
• The release of UK Manufacturing and Services PMI below the 50.0 threshold indicates that overall economic activities are contracting, signaling a vulnerable economic outlook.
• BoE policymakers also see the growth rate lower ahead. The BoE conveyed in its monetary policy statement that Q3 Gross Domestic Product (GDP) now is expected to rise 0.1% (Aug: +0.4%), with underlying growth in H2 2023 likely weaker than forecast in August.
• The reasoning behind a slowdown in the GDP numbers is the rising uncertainty over the interest rate peak before the general elections.
• In August, Retail Sales recovered strongly after washing out in July. On a monthly basis, consumer spending rose by 0.4% vs. expectations of 0.5%. In July, Retail Sales contracted by 1.1%, while the economic indicator excluding fuel prices matched expectations at 0.6%.
• The market mood remains cautious as investors see upside risks for a global slowdown. Global central bankers have paused their policy-tightening spell after raising interest rates significantly in the past two years as high inflation bites growth.
• The US Dollar Index (DXY) has traded inside the 105.27-105.78 range for the past three trading sessions as investors remain uncertain about the interest rate outlook in the remainder of 2023.
• Investors are infusing funds into the US Dollar amid a resilient US economy as it has absorbed the consequences of higher interest rates efficiently while other G7 economies are on the brink of recession.
• For further action, investors await the Durable Goods Orders data for August, which will be published on Wednesday.

Technical Analysis: Pound Sterling drops to near 1.2200

Pound Sterling price action has exposed the six-month low near 1.2200 against the US Dollar as the appeal for risk-perceived assets weakens due to global slowdown risks. The Cable struggles to find buying interest as investors remain worried about the UK’s economic growth. The GBP/USD outlook may remain weak as it is expected to continue its three-day losing spell if it fails to defend the immediate support of 1.2230. Downward-sloping 20 and 50-day Exponential Moving Averages (EMAs) warrant more weakness ahead.