Pound Sterling enters bearish trajectory as focus shifts to central bank policy

• Pound Sterling drops sharply as market sentiment turns bearish amid recession woes.
• United Kingdom authority remains concerned about economic growth due to aggressive policy tightening by BoE.
• Rising cost pressures, uncertain demand outlook, and tight credit policy build pressure on Pound Sterling.

The Pound Sterling (GBP) extends downside below the round-level support of 1.2800 as market sentiment turns negative and the United Kingdom loses resilience in an aggressively restrictive monetary policy environment. The GBP/USD pair faces wrath as the UK authority shows concerns about deepening recession fears due to consistent interest rate hikes by the central bank.

Higher inflation and restrictive interest rate policy elevate the burden on United Kingdom households as their real income squeezes sharply. Britain’s housing sector, retailers, and factories are going through turbulent times due to rising borrowing costs and uncertain forward demand. Despite restrictive factors, the BoE is preparing to raise interest rates further to achieve price stability.

Daily Digest Market Movers: Pound Sterling loses footing ahead of interest rate policy

• Pound Sterling stretches downside below 1.2800 as the United Kingdom economy loses resilience due to the aggressive interest rate policy by the Bank of England.
• UK’s housing sector, factory activities, and retail orders have come under pressure due to the heavy burden of higher inflation and soaring interest rates.
• Inflation in Britain softened beyond expectations in June but a one-time decline is insufficient to infuse optimism among households.
• A survey by the UK's Royal Institution of Chartered Surveyors (RICS) on Wednesday showed that 68% of respondents believe that the housing sector has turned vulnerable in the face of higher borrowing costs.
• The Confederation of British Industry (CBI) reported its monthly balance of retail sales, which compares volumes with a year ago, which fell to -25 in July from -9 in June, Reuters reported. CBI economist Martin Sartorius said cost pressures, a tight labor market, and rising interest rates, alongside uncertain demand conditions, make the current environment difficult to navigate for retailers."
• On Thursday, UK Treasury advisers to UK Finance Minister Jeremy Hunt flagged concerns about deepening recession fears due to aggressive policy-tightening by the BoE.
• The seven-member Economic Advisory Council is of the view that the central bank should slow down its rate-hiking spree, which is the fastest in three decades, as some economic indicators suggest a potential slowdown ahead for the economy.
• In spite of deepening recession fears, BoE policymakers cannot pause the rate-hiking spell as current inflationary pressures are four times the desired rate of 2%. Meanwhile, a significant recovery in oil prices has stemmed fears of a rebound in global inflation.
• The BoE prepares to raise interest rates by 25 basis points (bps) to 5.25% at its policy meeting scheduled for August 3. This will be the 14th consecutive interest rate hike by the UK central bank.
• Market participants anticipate that interest rates in the UK would peak around 5.75%.
• Investors seem baffled whether UK PM Rishi Sunak will fulfill his promise of halving inflation to 5% by year-end.
• The US Dollar Index (DXY) turns back-and-forth after a rally to near 101.80 as the United States economy performed surprisingly better in the second quarter than expected.
• US Gross Domestic Product (GDP) expanded at a higher pace of 2.4% vs. 2.0% for the first quarter. Investors were expecting that GDP expanded at 1.8% on an annualized basis.
• Durable Goods Orders data for June rose by 4.7% against expectations of 1.0% and May’s figure of 1.8%.
• For the week ending July 21, jobless claims for the first time rose by 221K, lower than expectations of 235K.
• After an interest rate hike to 5.25-5.50%, the Federal Reserve confirmed that September’s monetary policy would be data-dependent.
• Resilience in the US economy along with tight labor market conditions could force the Fed to continue the rate-hiking spell.

Technical Analysis: Pound Sterling declines toward 50-EMA at 1.2740

Pound Sterling prints a fresh fortnight low at 1.2763 as the market mood turns cautious. The Cable fails to sustain above the 20-day Exponential Moving Average (EMA) at 1.2858 and is declining toward the 50-day EMA, which is trading around 1.2740. The asset declines toward the lower portion of the Rising Channel chart pattern formed on a daily period, which could be bought by market participants.