Pound Sterling remains vulnerable due to deteriorating demand environment

• Pound Sterling recovered, but the broader bias remains weak due to deteriorating demand from households and corporations.
• After a series of contracting factory activities, the UK service sector shrunk for the first time since January.
• Market sentiment remains dampened as investors worry about global recession fears.

The Pound Sterling (GBP) weakened further after S&P Global reported that the United Kingdom’s service sector started shrinking due to infirm demand from households and the private sector amid a high-interest rate environment. The GBP/USD pair is attempting a recovery after printing a fresh 11-week low, though it could be used as a selling opportunity by market participants as the overall market sentiment is bearish.

The UK’s economy is expected to weaken further as the Bank of England (BoE) is preparing to raise interest rates further to sharpen monetary tools against a persistently high core Consumer Price Index (CPI). Investors anticipate a quarter-to-a-basis interest rate hike from the BoE on September 21, which will push interest rates to 5.50%. Meanwhile, investors await the S&P Global Construction PMI for August, which will be released at 08:30 GMT.

Daily Digest Market Movers: Pound Sterling recovery seems less confident

• Pound Sterling attempts recovery after a fresh 11-week low near 1.2530, while the broader bias is still bearish as the UK economy turns vulnerable due to restrictive monetary policy by the Bank of England (BoE).
• After declining UK factory activities, the service sector also comes under pressure as higher interest rates and rising prices ease household demand.
• Corporate demand has also dropped due to faltering economic growth and sticky inflation, weighing heavily on the economic outlook.
• S&P Global reported that the Services PMI for August dropped to 49.5 vs. July’s reading of 51.5 but remained higher than estimates of 48.7. The economic data remains below the 50.0 threshold for the first time since January.
• It seems that the cooling effects of higher interest rates by the BoE are impacting the overall spending and confidence of households and corporations in the UK economy.
• Tim Moore, Economics Director at S&P Global Market Intelligence, said, "Service providers saw customer spending reverse course during August as higher borrowing costs, subdued business confidence, and stretched household finances all acted to curtail sales opportunities.
• Meanwhile, BoE policymakers are gearing up to raise interest rates straight for the 15th time to sharpen monetary tools in the battle against persistent inflation.
• The BoE will announce the monetary policy on September 21. An interest rate hike of 25 basis points (bps) is expected, which will push interest rates to 5.50%.
• Going forward, investors will focus on the S&P Global UK Construction PMI for August, which will be published at 8:30 GMT. The economic data is seen dropping to 50.7 from 51.7 in July. UK construction activities weakened as households postponed home demand to avoid higher installment obligations.
• The market sentiment remains bearish as investors remain worried about the deteriorating global outlook in the battle against stubborn inflation.
• Risk-sensitive currencies are facing repercussions of higher interest rates by their respective central banks such as economic shrinkage and slower labor growth.
• The US Dollar reported a subdued performance on Wednesday morning, but the broader bias remains bullish as US recession fears recede significantly.
• Analysts at Goldman Sachs see a 15% chance that the US economy will slide into a recession as inflation cools down and job growth remains solid. Earlier, expectations of a recession in the US economy were at 20%.
• Further action in the US Dollar will be based on the US ISM Services PMI for August, which will be published at 14:00 GMT. The PMI data is seen dropping marginally to 52.5 vs. 52.47 in July.

Technical Analysis: Pound Sterling oscillates inside Tuesday’s range

Pound Sterling trades inside Tuesday's range of 1.2530 to 1.2630 as investors await more guidance on the interest rate outlook. The Cable remains vulnerable after stabilizing below the 20 and 50-day Exponential Moving Averages (EMAs). The asset is expected to extend its downside journey and may find an intermediate cushion near the 200-day EMA, which trades marginally below 1.2500. Momentum oscillators demonstrate that the bearish impulse is strengthening again.