Pound Sterling rebounds while broader outlook is bearish

• Pound Sterling finds interim support on upbeat S&P Global Services PMI data.
• The UK economy is on the brink of a technical recession.
• BoE’s Pill signals that policymakers are discussing when the central bank could start reducing interest rates.

The Pound Sterling (GBP) recovers in the European session on Monday due to a decent improvement in the UK’s S&P Global/CIPS Services PMI for January. The economic data rose to 54.3, better than expectations of 53.8 and the former reading of 53.4. The agency reported that a robust inflow of fresh orders, strong hiring in the last six months and deepening prospects of rate cuts by the Bank of England (BoE) led to a strong uptick in the Services PMI.

Supportive domestic factors back a sharp recovery in the Pound Sterling. However, the near-term outlook for risk-sensitive assets is bearish. The appeal of safe-haven assets is broadly upbeat as investors see the Federal Reserve (Fed) not rushing to cut interest rates. Receding risks of a recession in the United States due to strong labor and retail demand are allowing plenty of time for Fed policymakers to decide on rate cuts.

Daily Digest Market Movers: Pound Sterling revives gently as US Dollar rally stalls

• Pound Sterling finds tentative support near 1.2520 in the late Asian session on Tuesday. The broader appeal is still downbeat amid a cautious market mood.
• The outlook for risk-perceived assets is bearish as hopes of aggressive rate cuts by the Federal Reserve have waned due to resilient United States economic growth.
• As per the CME Fedwatch tool, investors see a rate cut of 25 basis points (bps) in May from earlier expectations of March. 
• The US economy is performing well amid improving order books for the factory and IT sector, upbeat labor market conditions, and robust consumer spending.
• Minneapolis Federal Reserve Bank President Neel Kashkari said on Monday that lower risks to economic growth are allowing more time for the central bank to decide on rate cuts.
• The Pound Sterling is also facing risks of a technical recession that could force Bank of England policymakers to lean towards a dovish interest rate stance.
• It is worth mentioning that an economy is considered to be in a technical recession if it contracts for two straight quarters.
• The United Kingdom's economy contracted by 0.1% in the third quarter of 2023, and the likelihood of a technical recession is high as it is expected to underperform again.
• A slight dovish guidance on interest rates from BoE Chief Economist Huw Pill has also dampened the appeal for the Pound Sterling.
• BoE Pill said on Monday that the stance of “if” it is appropriate to cut interest rates has changed to “when.”
• In the latest monetary policy statement, BoE Governor Andrew Bailey said inflation is moving in the right direction and kept borrowing costs “under review”.
• Due to a light economic calendar, market participants will focus on the speech from BoE Catherine Mann, which is scheduled for Thursday.  Mann was one of two out of nine Monetary Policy Committee (MPC) members who voted for a rate hike of 25 bps.

Technical Analysis: Pound Sterling delivers a pullback move from 1.2520

Pound Sterling delivers a recovery move from a seven-week low of 1.2520. The GBP/USD pair is advancing to test the breakdown of the Descending Triangle chart pattern formed on the daily time frame. The Cable could face an intense sell-off after a soft test of the breakdown region near 1.2600.

The 14-period Relative Strength Index (RSI) has slipped below 40.00 for the first time in three months. More downside is possible amid absence of divergence and oversold signals.