Pound Sterling edges down as concerns over UK economic slowdown mount

• Pound Sterling faces selling pressure as investors’ risk appetite diminishes.
• BoE Pill cautioned about an excessive economic slowdown due to the restrictive policy stance.
• Israel rejected a ceasefire offer but is open to fighting pauses for aid.

The Pound Sterling (GBP) faces a sell-off on Tuesday, paring some gains from the recent rally,  as risks of a slowdown in the United Kingdom economy are unabated due to higher interest rates by the Bank of England (BoE). The GBP/USD pair recovered sharply on Friday and Monday but struggled to maintain strength and trades around 1.2330 amid an absence of fundamental cushion for the Pound Sterling.

The recent recovery in the Cable was backed by an improvement in the market sentiment due to expectations of no more interest rate hikes from the Federal Reserve (Fed) and no further escalation in Middle East tensions. However, risks of the UK economy entering into a recession are high as sectors including manufacturing, services, and housing are struggling to absorb the effect of higher interest rates by the BoE. Already weak British consumer spending is expected to worsen further as individuals face an escalating cost of living crisis.

Daily Digest Market Movers: Pound Sterling weakens on growing slowdown fears

• Pound Sterling dropped to near 1.2330 after facing a sell-off above the round-level resistance of 1.2400 as the risk appetite of the market participants diminished.
• The GBP/USD pair corrects as investors see upside risks of the UK economy entering into a recession due to a historically tight monetary policy by the Bank of England (BoE).
• Weak consumer spending due to higher cost of living has deteriorated the demand outlook. This has led to a slowdown in hiring, scale of production, and business investment.
• A survey from Accenture and YouGov indicated that two-thirds of UK adults are not interested in participating in Black Friday, Cyber Monday, or Boxing Day discounts due to the deepening cost of living crisis.
• S&P Global, in its October report, showed that PMIs in all sectors such as manufacturing, services and construction remained below the 50.0 threshold. The Construction PMI, released on Monday, improved to 45.6 expectations of 44.5 and the former reading of 45.0 but remained below the 50.0 threshold.
• Construction spending has come down significantly as home-buyers have postponed their plans of investment in the housing sector to avoid higher borrowing costs.
• BoE's Chief Economist Huw Pill said Monday that upside risks to an excessive slowdown are high as the central bank is committed to bringing down inflation to 2% by keeping monetary policy restrictive sufficiently longer.
• Pill added that the central bank is aware of the consequences of economic slowdown on people with lower incomes in the fight against stubborn inflation.
• In its latest forecasts, the BoE conveyed that the economy will flatline in the next two years and the growth rate in 2026 would be less than 1%.
• While discussing rate cuts, Pill said that rate cuts before mid-2024 seem totally unreasonable as inflation is still more than thrice the desired rate of 2%.
• This week, investors will keenly focus on the Q3 GDP data, which will show the repercussions of tight monetary policy. According to the preliminary estimates, the UK economy is expected to contract by 0.1%, against 0.2% growth in the April-June quarter.
• Meanwhile, geopolitical tensions keep the market mood at bay. Israeli Prime Minister Benjamin Netanyahu said that his administration is open to little pause to the ground invasion in Gaza but not to a general ceasefire.
• The US Dollar, when tracked by the US Dollar Index, found an intermediate support near 105.00 but the near-term demand seems weak as investors hope that the historically tight rate-hiking campaign by the Federal Reserve (Fed) has concluded.
• Minneapolis Fed Bank President Neel Kashkari said Monday that the US economy has proved to be resilient despite elevated interest rates but the central bank has a lot of work ahead to tame consumer inflation.

Technical Analysis: Pound Sterling falls gradually from 1.2400

Pound Sterling extends its correction to near 1.2320 after facing selling pressure above the crucial resistance of 1.2400. The 200-day Exponential Moving Average (EMA) around 1.2400 has been acting as a critical barrier for the Pound Sterling bulls. The Cable is gradually declining after a breakout of the symmetrical triangle chart pattern formed on a daily time frame, which is a general course of action.

Fresh buying in the GBP/USD pair could appear after completing the correction to near the 50-day or 20-day EMAs.