Pound Sterling remains subdued ahead of BoE monetary policy

• Pound Sterling tests crucial support of 1.2700 ahead of BoE’s interest-rate policy.
• A fat rate hike announcement by the BoE would elevate recession fears in the United Kingdom.
• UK’s 12-month consumer inflation expectations soften to 4.3%.

The Pound Sterling (GBP) continues its two-day losing spell as investors seem cautious ahead of the interest rate decision by the Bank of England (BoE). The GBP/USD pair faces pressures of bearish market sentiment and fears of a deep recession in the United Kingdom as the central bank prepares to raise interest rates consecutively for the 14th time.

Investors remain mixed about the pace at which interest rates will be raised by the BoE. Inflationary pressures in the United Kingdom economy are highest among G7 economies and households face the heavy burden of a squeeze on their real income. Consideration of a fat interest rate hike by the BoE would dampen the economic outlook.

Daily Digest Market Movers: Pound Sterling turns cautious ahead of interest rate policy

• Pound Sterling tests 1.2700 amid cautious market mood ahead of the Bank of England monetary policy decision.
• This would be the 14th consecutive interest-rate hike by the BoE in which policymakers are expected to consider a 25 basis point (bp) increase to elevate interest rates to 5.25%.
• The option of a second consecutive 50 bps rate push by the BoE is still in the picture, knowing that inflation in the United Kingdom economy is four times the required rate of 2%.
• Also, the recent recovery in oil prices and resilient consumer spending could force BoE policymakers to discuss a fat rate hike for the August policy.
• Meanwhile, a survey from Citi/YouGov shows that one-year forward consumer inflation expectations drop sharply to 4.3% vs. former expectations of 5.0%.
• Credit Suisse forecasts that one member (Swati Dhingra) is likely to vote for unchanged rates, but there are risks that if the majority vote is for 50 bps, one or two members vote for 25 bps.
• Apart from the interest rate decision, the outlook on inflation and the economy, and policy guidance for the remaining 2023 will be in focus.
• Also, investors would like to know whether UK PM Rishi Sunak would meet his promise of halving inflation to 5% by year-end.
• UK’s housing sector and factory activities face the heat of an aggressive rate-tightening cycle by the central bank. Factory activities have been contracting for several months due to weak global demand and higher unsold inventory.
• Britain’s mortgage lender Nationwide reported on Tuesday that housing prices fell by the most in July since 2009 on an annual basis. The reasoning behind the decline in housing demand is the lower affordability power of first-time buyers due to higher borrowing costs.
• Before BoE’s policy, investors will focus on the Services PMI for July, which will be published at 08:30 GMT. The economic data is seen as stable at 51.5.
• The market mood is extremely cautious as Fitch downgrades the United States government, citing concerns over rising fiscal spending in coming years.
• US Treasury Secretary Janet Yellen said that the Fitch downgrade to the US economy is ‘entirely unwarranted’ as the economy is resilient due to a tight labor market and continued growth.
• Along with Yellen, JPMorgan chief executive Jamie Dimon told CNBC on Wednesday that the United States government's long-term debt rating downgrade was "ridiculous," saying "It doesn't really matter". The Fitch downgrade is based on those economic indicators that are already known.
• The US Dollar Index continued its five-day winning spell on Thursday as upbeat Automatic Data Processing (ADP) Employment Change data set a positive undertone for Friday’s Nonfarm Payrolls (NFP) and the Federal Reserve’s (Fed) September monetary policy.
• Before US NFP, Services PMI for July will be reported by the Institute of Supply Management (ISM). Unlike factory activities, the service sector is expanding but the July reading is expected to remain lower at 53.0 against June’s figure of 53.9.

Technical Analysis: Pound Sterling retraces 80% from July’s high

Pound Sterling retraced almost 80% from its July high of 1.3140 on Thursday. The Cable came under severe pressure after slipping below the 20 and 50-days Exponential Moving Averages (EMAs). The asset delivers a breakdown of the Rising Channel chart pattern but needs to pass through more filters for confirmation.