Pound Sterling rises on cheerful market mood, PMI’s in focus

• Pound Sterling reclaims weekly high on upbeat market sentiment.
• Investors see a technical recession in the UK economy as the cost-of-living crisis deepens.
• The appeal of risk-sensitive assets remains upbeat despite easing Fed rate-cut bets.

The Pound Sterling (GBP) recaptures weekly high amid higher risk-appetite. The GBP/USD pair remains upbeat despite the United Kingdom economy threatening to tip into a technical recession. This has come about due to vulnerable household spending and steep pessimism among business owners over the economic outlook.

The Bank of England (BoE) is expected to struggle to reach a decision because of stubbornly higher price pressures and recession fears. This will make it difficult for policymakers to stick to a restrictive interest rate stance. The market mood remains cheerful despite investors shifting their bets to the May monetary policy meeting for the first rate-cut by the Federal Reserve (Fed), which was previously anticipated in March. Fed policymakers have been supporting the narrative of higher interest rates for a longer period to ensure inflation returning to the 2% target in a timely manner.

Daily Digest Market Movers: Pound Sterling capitalizes on risk-on mood

• Pound Sterling rises sustainably above the crucial resistance of 1.2700 despite unfavourable conditions for Bank of England policymakers in maintaining a restrictive monetary policy stance after a big drop in the Retail Sales data for December.
• The UK Office for National Statistics (ONS) reported that annual Retail Sales surprisingly fell 2.4% while investors projected a growth of 1.1%. The ONS said households were doing Christmas shopping earlier than usual. Sales at food stores were significantly down.
• A sharp decline in consumer spending indicates a deepening cost-of-living crisis due to higher interest rates and stubborn price pressures.
• This has tipped fears of a recession in the UK economy as weak spending by households would discourage firms to maintain current production levels.
• It is worth mentioning that the UK economy, as per the latest estimates from the ONS, reported a decline in growth in the Q3 Gross Domestic Product (GDP) of 2023 by 0.1%. If the economy contracts in Q4 too, it will be considered a technical recession. 
• On the inflation side, the UK economy is operating with core inflation at 5.1% and the service price index at 6.4%, which are BoE’s preferred inflation tools while considering monetary policy decisions. 
• Price pressures in the UK economy are stubborn if compared with inflation in other Group of Seven economies, making it complicated for policymakers to choose between a restrictive policy stance for higher inflation or unwinding of tight interest rates to safeguard the economy from shifting into a recession.
• This week, market participants will focus on the preliminary S&P Global PMI for January, which will be published on Wednesday. As per the expectations, the economic data is expected to remain upbeat.
• Meanwhile, the market mood is upbeat despite chances of the Federal Reserve (Fed) keeping interest rates unchanged in March rising significantly.
• As per the CME FedWatch tool, traders see a more than 54% chance of the Fed keeping interest rates unchanged in March.
• The US Dollar Index (DXY) has dropped to near 103.20 amid a cheerful market mood. 10-year US Treasury yields have dropped to near 4.12%.

Technical Analysis: Pound Sterling aims at stabilization above 1.2700

Pound Sterling climbs above round-number-level resistance at 1.2700 amid risk-on market sentiment. The near-term demand for the GBP/USD pair has turned bullish as it has jumped above the 20-day Exponential Moving Average (EMA), which trades near 1.2700. The 50-day EMA is near 1.2617. Fresh upside would appear if the Cable manages to climb above the round-level resistance of 1.2800.

The 14-period Relative Strength Index (RSI) trades in the 40.00-60.00 range, which indicates a sideways performance.