Pound Sterling recovers as investors' risk appetite improves

• Pound Sterling rebounds as investors ignore vulnerable UK S&P Global PMI data.
• United Kingdom's economy remains vulnerable due to rising mortgage rates.
• BoE policymakers warned about rising corporate default risks due to higher borrowing costs.

The Pound Sterling (GBP) recovered due to an upbeat market mood while the broader bias remains bearish as S&P Global reported vulnerable preliminary PMI data for August. Earlier, the GBP/USD pair dropped vertically as the UK Manufacturing PMI dropped significantly to 42.5 from estimates of 45.0 and the prior release of 45.3. This has been the lowest factory data figure since the pandemic period, which demonstrates the consequences of higher interest rates by the Bank of England (BoE). Additionally, Services PMI shifted into the contraction phase below the 50.0 threshold. The economic data landed at 48.7, lower than estimates of 50.8 and July’s reading of 51.3.

BoE policymakers warned about rising corporate default risks due to a weak debt-service coverage ratio. United Kingdom small and mid-size firms are struggling to cover interest obligations amid rising borrowing costs and a dismal economic outlook. Meanwhile, a decline in pay hikes in the quarter ending in July after six consecutive strong quarters provides some comfort to BoE policymakers.

Daily Digest Market Movers: Pound Sterling recovers as US PMI weakens

• Pound Sterling delivered a perpendicular breakdown to near 1.2630 after S&P Global reported weaker-than-anticipated PMI data for August.
• UK Manufacturing PMI dropped significantly to 42.5 from estimates of 45.0 and the prior release of 45.3. This has been the lowest factory data figure since the pandemic period. Additionally, Services PMI shifted into the contraction phase below the 50.0 threshold. The economic data landed at 48.7, lower than estimates of 50.8 and July’s reading of 51.3.
• UK economic activities have been facing the wrath of the aggressive rate-tightening cycle by the Bank of England.
• British Confederation of British Industry's (CBI) report showed the net balance of output for the three months to August fell to -19 from +3 in July. This has been the lowest reading since September 2020. The net balance demonstrates the difference between portions of factories reporting rising output against those projecting a decline.
• The BoE warned about significant upside risks to corporate defaults amid higher interest rates. A survey from the BoE shows that the share of non-financial UK companies experiencing a weak debt-service coverage ratio will rise to 50% by year-end from last year’s reading of 45%.
• Rising risks of corporate default will elevate delinquency costs for UK commercial banks, which will dampen their asset quality.
• British Chambers of Commerce said concerning rising risks of corporate defaults that higher borrowing costs are putting significant pressure on many smaller businesses, who after three years of economic shocks, are unable to absorb the increases.
• A majority of companies experiencing rising corporate debt-service stress will elevate the risk of a recession in the UK economy.
• Pay awards delivered by British employers cooled down for the first time in the past seven quarters.  XpertHR reported median basic pay deals for three months to July fell to 5.7% from a record 6%.
• A decline in pay awards will ease some pressure from BoE policymakers, who believe that strong wage growth has been keeping inflation persistent.
• Discussions about the UK’s cabinet reshuffle remained hot this weekend. Reuters reported that PM Sunak is now considering focusing on replacing ministers who have already said they want to step down, such as former Defence Secretary Ben Wallace.
• The market mood is extremely quiet as investors await the Jackson Hole Symposium for further action.
• The US Dollar Index (DXY) gathers strength to climb above the immediate resistance of 103.70. Consumer spending resilience and a tight labor market could keep the remaining excess inflation extremely stubborn.
• Richmond Federal Reserve (Fed) Bank President Thomas Barkin said on Tuesday that if inflation remains high and demand gives no signal, it is likely to drop. That environment would require a tighter monetary policy. Fed Barkin expects that the recession situation will be ‘‘less severe’’.
• The speech from Fed Chair Jerome Powell at Jackson Hole is expected to be hawkish. The Fed is expected to keep interest rates higher for longer. Prospects about an interest rate hike will be more data-dependent.

Technical Analysis: Pound Sterling rebounds from 1.2600

Pound Sterling delivers a steep fall after vulnerable PMI data. The Cable is exposed to a breakdown of the consolidation formed in the 1.2700-1.2800 range in the past seven trading sessions. 20 and 50-day Exponential Moving Averages (EMAs) have turned straight, portraying a sideways trend.