Pound Sterling weakens as UK’s high inflation and weak labor demand trigger stagflation risk

• Pound Sterling eyes more downside on jittery market mood.
• A sudden policy-tightening pause by the BoE highlights a poor economic outlook.
• Investors await the UK’s Q2 GDP data for further guidance.

The Pound Sterling (GBP) extends its five-day losing spell as investors foresee the United Kingdom economy shifting into a recession due to deteriorating labor market conditions and a poor demand outlook. The GBP/USD pair is expected to deliver more losses as a pause in the rate-tightening cycle by the Bank of England (BoE) would elevate consumer inflation expectations.

BoE’s unexpected pause in its historically aggressive rate cycle has not only highlighted policymakers’ concern about the UK’s economic turmoil, but it has also raised uncertainty over the inflation outlook. Britain’s energy prices have been propelled by the global oil rally and are set to make inflation hotter again. A situation of high inflation and weak labor demand may trigger a stagflation risk ahead.

Daily Digest Market Movers: Pound Sterling faces the consequences of BoE’s rate-cycle pause

• Pound Sterling faces the wrath of a risk-off market mood as investors remain worried about the global economy due to deepening risks of higher interest rates.
• The market mood remains jittery as investors see the global economy struggling to absorb the consequences of restrictive monetary policy by central bankers.
• The consequences of higher interest rates on the UK economy are impacting labor market conditions and economic activities.
• UK employers laid off workers in the past two months as firms shifted focus to controlling costs due to the deteriorating demand environment.
• Though demand for labor has fallen, wage growth remains strong enough that the inflation outlook remains stubborn.
• Like the contracting UK Manufacturing PMI, the UK Services PMI slipped below the 50.0 threshold for the second time in a row. This indicates that households’ real income is being squeezed due to higher inflation and a recovery in gasoline prices.
• Despite strong wage growth and a stubborn consumer inflation outlook, the BoE decided to pause the policy-tightening spell last week. This indicates that BoE policymakers are more worried about upside risks to economic turmoil rather than persistent inflation.
• The Pound Sterling is on investors’ selling list due to expectations that the BoE is done hiking interest rates. Contrary to that, the US Dollar has remained resilient after a pause in the policy-tightening spell by the Federal Reserve (Fed).
• A pause in Fed tightening is due to falling inflation and strong economic prospects. In the US economy, labor demand is strong, consumer spending is robust, and wage growth is steady.
• Going forward, investors will focus on the UK’s April-June quarter Gross Domestic Product (GDP) data, which will be published on Friday. Quarterly and annualized GDP data are foreseen to expand at a steady pace of 0.2% and 0.4%, respectively.
• The US Dollar Index (DXY) trades near a fresh 10-month high around 106.30 as Fed policymakers support further policy-tightening to ensure price stability.
• As the US economy has been performing well in comparison with other G7 economies, inflationary pressures in excess of the desired rate of 2% will not fade easily. This has forced Fed policymakers to maintain a hawkish stance on the interest rate outlook.
• On Wednesday, investors will keenly watch the US Durable Goods Orders for August, which will be released at 12:30 GMT. Orders are seen contracting at a slower pace of 0.4% against the 5.2% decline seen in July.

Technical Analysis: Pound Sterling prints a fresh six-month low at 1.2135

Pound Sterling reports a bearish closing for fifth time in a row. The GBP/USD pair continued its losing spell on Wednesday after slipping below the crucial support of 1.2152. The Cable refreshes a six-month low at 1.2135 and is expected to extend the downside toward the round-level support of 1.2100. A bear cross, represented by the 20 and 200-day Exponential Moving Averages (EMAs), warrants more weakness ahead. Momentum oscillators have reached oversold levels.