Pound Sterling drops below 1.22 as Israel-Hamas war underpins risk-aversion theme

• Pound Sterling faces a sell-off as the bellicose situation between Israel and Hamas dampens the market mood.
• UK’s manufacturing and construction activities are going through a vulnerable phase due to higher mortgage rates.
• BoE Bailey remains confident that inflation will come down to 5% or below by year-end.

The Pound Sterling (GBP) corrected on Monday following a short-lived pullback as the Israel-Hamas conflict that began over the weekend strengthened the risk-aversion theme. The GBP/USD pair dropped sharply as the Federal Reserve (Fed) is expected to keep one more interest rate hike in consideration, while the Bank of England (BoE) may keep interest rates unchanged to phase out fears of a recession in the United Kingdom’s economy.

In the tussle against persistent inflationary pressures, the UK’s economic prospects are losing their resilience as the demand outlook deteriorates. UK firms are reluctant to raise funds at higher borrowing costs, which has reduced labor demand and overall output. The situation is expected to remain vulnerable for a longer period as the BoE vowed to keep interest rates restrictive until inflation comes down to 2%.

Daily Digest Market Movers: Pound Sterling corrects sharply on risk-off mood

• Pound Sterling extends correction below crucial support at 1.2200 as the market mood has become quite risk-off in nature due to the Israel-Hamas war.
• The broader market mood is downbeat as the Israel-Hamas conflict could suck in foreign players, which could lead to a global conflict.
• The war began with the Palestinian military group Hamas invading Israel on the morning of October 7 in an unprecedented attack. 
• The GBP/USD pair recovered for three trading sessions in a row last week after finding buying interest near 1.2050 as Bank of England policymakers were confident about achieving price stability.
• BoE Governor Andrew Bailey said last week that inflation could come down to 5% or below by year-end. This indicates that UK Prime Minister Rishi Sunak would be able to fulfill his promise of halving inflation to 5.2% by the end of 2023.
• BoE policymaker Ben Broadbent sees the achievement of price stability in two years. He further added that there are “clear signs” that higher interest rates have hit demand and elevated the Unemployment Rate.
• Higher interest rates have dampened the UK’s Manufacturing and Construction PMI significantly in September. S&P Global reported the UK Construction PMI at 45.0 in September, much lower than expectations of 49.9 and the former release of 50.8. A figure below the 50.0 threshold is considered a contraction. 
• Going forward, investors will focus on the UK’s Financial Policy Committee (FPC) meeting minutes, which will be released on Tuesday at 09:30 GMT. The FPC is an official committee of BoE that monitors macroeconomic and financial issues, that could impact long-term growth prospects of the UK economy.
• This week, UK factor activity data for August will be keenly watched. The Industrial and Manufacturing Production data are expected to continue the contraction spell but at a slower rate.
• The US Dollar Index (DXY) recovered after correcting to near 106.00, supported by cautious market sentiment and rising expectations of one more interest rate increase from the Federal Reserve (Fed) after an upbeat Nonfarm Payrolls (NFP) report for September.
• The US labor force witnessed 336K fresh jobs last Friday, much higher than estimates of 170K and the former release of the upwardly-revised 227K. The Unemployment Rate remains steady at 3.8%, nominally higher than expectations of 3.7%. 
• The monthly wage rate grew by 0.2% but lower than expectations of 0.3%. The annualized wage rate decelerated to 4.2% vs. the estimates and the former release of 4.3%.
• The US economy has been resilient due to tight labor market conditions, robust consumer spending, and a revival in factory activities. This could keep the last leg of inflation sticky and elevate expectations of further policy-tightening.
• The US Dollar is expected to remain volatile this week as investors will focus on the consumer inflation data for September, which will be released on Thursday.

Technical Analysis: Pound Sterling faces sell-off near 1.2250

Pound Sterling faces selling pressure after sensing barricades near the immediate resistance of 1.2250. The appeal for the GBP/USD pair remains poor as market sentiment remains downbeat, and investors are worried about the UK’s economic prospects. The broader GBP/USD outlook dampens as the 50 and 200-day Exponential Moving Averages (EMAs) have delivered a Death Cross, which warrants more downside. Potential support is placed around 1.2000.