Pound Sterling falls on cautious market mood, speech from BoE Bailey eyed

• Pound Sterling drops further ahead of BoE Bailey’s speech.
• The UK economy is on the brink of shifting into a technical recession.
• Market mood remains downbeat ahead of US Inflation data.

The Pound Sterling (GBP) faces a sharp sell-off as uncertainty over the Bank of England’s (BoE) restrictive monetary policy stance persists due to deepening risks of a technical recession in the United Kingdom. The GBP/USD pair remains on the backfoot as market mood has turned risk-averse ahead of the United States inflation data for December.

Going forward, the Pound Sterling will be guided by a speech from Bank of England Governor Andrew Bailey who is expected to provide an outlook on interest rates and inflation. Investors will keep watch of whether the BoE will prioritize saving the economy from further slowdown or taming inflationary pressures. On the economic data front, market participants will look to UK factory data, which is due to release on Friday. Market participants are anticipating a decent recovery in Industrial and Manufacturing Production data.

Daily Digest Market Movers: Pound Sterling remains on backfoot amid cautious sentiment

• Pound Sterling has dropped further to support from the round-number level at 1.2700 as investors are uncertain about Bank of England’s support for keeping interest rates high for an elongated period.
• According to the revised estimates from the Office for National Statistics (ONS), the UK economy is on the brink of a technical recession as it was shrunk by 0.1% in the third quarter of 2023.
• Also, the BoE is unsure about any growth in the last quarter of 2023, which indicates that the likelihood of a recession is high.
• While the service sector is consistently in the expansion phase, the manufacturing sector is facing pain of delayed execution amid uncertainty due to weak demand from the domestic economy and the external market.
• In addition to bleak economic prospects, inflation in the UK economy is highest in comparison with other Group of Seven economies, which is also a hard nut to crack to BoE policymakers.
• The BoE has to perform a balancing act between safeguarding the economy by rolling back high interest rates or sticking with a restrictive stance, thus keeping price stability a priority.
• For further guidance on interest rates and inflation, investors will focus on the speech from BoE Governor Andrew Bailey, which is scheduled for 15:15 GMT. 
• Later this week, investors will focus on UK factory data and monthly Gross Domestic Product (GDP) for November. Economists project that the UK economy will have grown by 0.2% after shrinking 0.3% in October.
•  The market mood remains risk-off as investors await the United States Consumer Price Index (CPI) data for December, which will be published on Thursday January 11 at 13:30 GMT.
• Investors see the core CPI that excludes volatile food and Oil prices slowing to 3.8% against 4.0% from November. In the same period, the headline inflation is expected to have grown by 3.2% versus. 3.1%.
• Over interest rate guidance, Atlanta Federal Reserve (Fed) Bank President Raphael Bostic is naturally biased towards a tighter stance till inflation remains above the 2% target. 
• Raphael Bostic sees two interest rate cuts this year, first somewhere in the third quarter and the second one will be needed by 2024 end. The Atlanta Fed President is considered to be quite hawkish. Current market expectations are for a cut as soon as March. 

Technical Analysis: Pound Sterling drops to near 1.2670

Pound Sterling declines toward two-day low of 1.2670 as investors turn cautious ahead of crucial US inflation data. The GBP/USD pair fell back after failing to extend recovery above the critical resistance of 1.2770. 

On a daily time frame, the Cable struggles to sustain above the 61.8% Fibonacci retracement (of the move from the 13 July 2023 high at 1.3142 to 4 October 2023 low at 1.2037) at 1.270. The 20-day Exponential Moving Average (EMA) around 1.2680 continues to provide support to the Pound Sterling bulls. The Relative Strength Index (RSI) (14) has shifted into the 40.00-60.00 range, which guides a consolidation ahead.