Pound Sterling recovers as investors digest consequences of tight BoE policy

• Pound Sterling finds bids near 1.2180 and is expected to recapture the weekly high.
• Investors remain uncertain whether UK PM Sunak fulfills the promise of halving inflation by year-end.
• Jeremy Hunt is expected to raise the minimum wage to offer some relief to workers against high inflation.

The Pound Sterling (GBP) has resumed its upside journey after a mild correction from its weekly high as investors expect an improvement in the United Kingdom’s learning curve in handling the repercussions of higher interest rates by the Bank of England (BoE). The BoE has paused its policy-tightening spell after raising them to 5.25% to safeguard the economy from further slowdown.

A sheer volatility is anticipated in the Pound Sterling ahead as UK Finance Minister Jeremy Hunt is expected to raise the minimum wage and ignore tax cuts at the annual Conservative Party conference. Apart from that, S&P Global Manufacturing PMI data for September will be keenly watched. The Manufacturing PMI is expected to remain below the 50.0 threshold for the 14th time in a row.

Daily Digest Market Movers: Pound Sterling rebounds despite UK recession risks

• Pound Sterling recovered from 1.2180 despite investors remaining worried about the upside risks of a recession in the UK economy.
• Higher interest rates by the Bank of England and consumer inflation risks due to a pause in policy tightening have dented the demand outlook.
• Like other developed economies, the UK’s manufacturing sector has also gone through a vulnerable phase. Its labor demand and Services PMI were performing well, but now they are also facing the wrath of tight monetary policy and stubborn inflation.
• UK employers reduced their labor force in the last two months as firms aim to achieve efficiency through controlling costs in an uncertain demand environment. Services PMI has landed below the 50.0 threshold two times in a row, which indicates a contraction in service activities.
• For more clarity on UK factory activities, investors will focus on the S&P Global Manufacturing PMI data for September, which will be published at 08:30 GMT. The economic data is foreseen to remain unchanged at 44.2. This would be the 14th contraction in a row.
• The UK’s housing market consistently faces the consequences of higher interest rates. The BoE reported on Friday that credit approvals for house purchases dropped sharply to 45,354 vs. Reuters’ expectations of 49,532 as mortgage rates rise.
• Going forward, investors will focus on the announcement of a higher minimum wage by UK FM Jeremy Hunt at the annual Conservative Party conference. This weekend, UK Hunt announced, "We are waiting for the Low Pay Commission to confirm its recommendation for next year. But I confirm today, whatever that recommendation, we will increase it next year to at least 11 pounds an hour," as reported by Reuters.
• Jeremy Hunt ruled out tax cuts ahead of November’s mid-year fiscal statement to support UK PM Rishi Sunak’s promise of halving headline inflation by year-end.
• Meanwhile, the market mood has begun improving as investors shrug off the risk associated with a global slowdown. The US Dollar Index (DXY) faces selling pressure around 106.00.
• The USD index remained volatile on Friday despite a soft core Personal Consumption Expenditure (PCE) report for August. Monthly Core PCE expanded at a nominal pace of 0.1% in August against expectations and the former release of 0.2%. The annualized Core PCE has softened to 3.9% as expected from the former release of 4.3%.
• The Federal Reserve’s preferred inflation tool, Core PCE, now makes it less likely that the central bank will add another rate hike this year.

Technical Analysis: Pound Sterling recovers from six-month low

The Pound Sterling aims to keep recovering from its six-month low near 1.2110 intact. The outlook for the GBP/USD pair would improve on a recovery extension above the weekly high at 1.2270. The GBP/USD pair discovered buying interest as momentum oscillators turned oversold. The Cable could deliver a mean-reversion move to near the 20-day Exponential Moving Average (EMA) at 1.2340. The broader bias remains weak as the Cable is trading below the 200-DEMA, which trades around 1.2465.