Pound Sterling remains delicate amid deepening recession risks

• Pound Sterling rebounds from 14-week low but recovery seems restricted due to deepening recession fears.
• UK housing and manufacturing sectors have surrendered against BoE’s aggressive tightening policy.
• BoE Broadbent said interest rates need to remain higher for some time as inflation in Britain leads G7 economies.

The Pound Sterling (GBP) recovered after printing a fresh 14-week low, but the broader bias remains bearish as the British economy is exposed to a possible recession due to an aggressive rate-tightening cycle by the Bank of England (BoE). The GBP/USD pair communicates fears about rising interest rates as the tight labor market is losing its appeal, and firms have reported a decline in production due to a dismal demand outlook.

Investors are worried that the UK economy could shift into a recession as the housing sector, economic activities and the labor market are struggling to carry the burden of a restrictive monetary policy. Likely, the risk of a slowdown has eased bets about the interest rate peak at 6.0%, but an interest rate hike at the September monetary policy meeting cannot be ruled out entirely.

Daily Digest Market Movers: Pound Sterling recovery seems less confident

• Pound Sterling delivers a recovery move after a sharp sell-off to near 1.2560 as the risk-off impulse eases. However, the downside bias is still solid.
• The asset printed a fresh 12-week low as investors are worried about the UK’s economic outlook as the Bank of England (BoE) is consistently raising interest rates in the battle against stubborn inflation.
• More interest rate hikes from the BoE are expected as core inflation is still more than three times the desired rate of 2%.
• UK’s hiring momentum has slowed and economic activities have turned vulnerable as the current tightening cycle by the BoE is historically aggressive.
• Traders betting on an interest rate hike to 6.0% have trimmed, and now chances are the UK central bank will pause the tightening spell after pushing interest rates to 5.75%.
• The GfK consumer sentiment indicator improved to -25 in August from a three-month low of -30 in July as UK fuel suppliers passed on the impact of lower energy prices to end consumers.
• BoE Deputy Governor Ben Broadbent said on Saturday that interest rates need to remain higher for some time as inflation in Britain is the highest among G7 economies.
• About interest rates, BoE Broadbent responded "The evidence on spare capacity, and to indicators of domestic inflation, as and when it comes through."
• Meanwhile, the BoE is preparing to raise interest rates further in September. UK central bank is expected to raise interest rates by 25 basis points (bps) to 5.50%.
• UK markets will remain closed on Monday on account of the Summer Bank Holiday.
• The market mood is upbeat as investors digested that the Federal Reserve (Fed) will follow the ‘’higher for longer’’ interest rate path.
• Fed Chair Jerome Powell commented at the Jackson Hole Symposium that the central bank will remain very careful about interest rates at upcoming monetary policy meetings. Jerome Powell confirmed that the central bank will keep the doors open for further policy tightening.
• As per the CME Fedwatch tool, there is a more than 80% chance of a neutral interest rate decision in September while the majority of investors are betting on an interest-rate hike in November policy.
• The US Dollar Index (DXY) corrects to near 104.00 despite Jerome Powell delivering a hawkish commentary at the Jackson Hole Symposium last Friday. The corrective move has been gradual, therefore, chances of a bounce back are extremely solid.
• This week, investors will keenly focus on the US Nonfarm payrolls (NFP) data, which will be published on Friday at 12:30 GMT. In addition to that, ISM Manufacturing PMI for August will also remain in focus.

Technical Analysis: Pound Sterling upside remains restricted around 1.2600

Pound Sterling upside seems restricted near the round-level resistance of 1.2600 as the UK economy is exposed to a possible recession due to high-interest rates. The Cable delivered a breakdown of the three-week support at 1.2620 and is declining toward the 200-day Exponential Moving Average (EMA), which is trading at 1.2480. A bearish crossover delivered by 20 and 50-day EMAs warrants more weakness ahead. Daily momentum oscillators indicate that a bearish impulse has been activated.