Pound Sterling upside looks limited as UK economy seems exposed to recession

• Pound Sterling struggles to extend upside amid multiple headwinds.
• Despite a significant improvement, the UK Services PMI failed to conquer the 50.0 threshold.
• Andrew Bailey remains confident of bringing down inflation to 5% or below by year-end.

The Pound Sterling (GBP) recovers as the appeal for risk-perceived assets improves but struggles to extend the upside. The upside in the GBP/USD pair seems limited as the United Kingdom’s economy is approaching a slowdown due to vulnerable economic activities, potential inflation shocks, and deteriorating demand. 

In spite of an improvement in the UK Services PMI, the economic data remains below the 50.0 threshold, suggesting a contraction. The UK economy is failing to absorb the consequences of higher interest rates by the Bank of England (BoE), rising oil prices, and supply chain disruptions due to the Russia-Ukraine war. 

Daily Digest Market Movers: Pound Sterling awaits Construction PMI data

• Pound Sterling aims to extend upside toward the round-level resistance of 1.2200 as the US Dollar shifts on the backfoot after the release of the weaker-than-anticipated US ADP Employment Change data.
• A decline in appeal for the US Dollar has improved market sentiment and en-route investment into the risk-perceived assets.
• The GBP/USD pair made a recovery attempt on Wednesday after a better-than-projected UK Services PMI for September.
• S&P Global reported that the Services PMI remained below the 50.0 threshold for the second straight time but outperformed expectations meaningfully.
• The Services PMI landed at 49.3, higher than expectations and the former release of 47.2. S&P Global reported that the improvement came in the economic data due to sustained easing of inflationary pressure. Several businesses were optimistic as the Bank of England paused the policy-tightening spell.
• The data-collecting agency warned that the broader outlook is still sluggish amid higher borrowing costs and a weak order book due to subdued economic conditions. British producers have cut back on new orders and labor due to tepid demand. Rising oil prices and supply chain disruptions could keep the UK economy on the backfoot.
• Meanwhile, BoE Governor Andrew Bailey warned about potential inflation shocks but remained confident of bringing down inflation to 5% or less by year-end. Andrew Bailey opposed changing the UK’s 2% inflation target.
• Earlier, BoE policymaker Katherine Mann also warned that policymakers are facing a “world where inflation shocks are likely to be more frequent” with stronger price growth, meaning interest rates will need to be permanently higher.
• Going forward, investors will focus on the S&P Global Construction PMI data for September, which will be published at 08:30 GMT. As per the estimates, the economic data is foreseen easing to 49.9 against the 50.8 reading from August. 
• UK construction spending is expected to decline as households are reluctant to invest in the housing sector due to higher mortgage rates.
•  The US Dollar Index (DXY) finds an intermediate cushion near 106.50, but a volatile action is widely anticipated as investors shift focus to the September Nonfarm Payrolls (NFP) report after weak ADP job data.
• ADP reported that fresh additions of private payrolls in September were halved to 89k from the August reading. Investors already anticipated lower hiring at 153k. 
• Soft labor market data is expected to fade expectations of one more interest rate hike from the Federal Reserve (Fed) in the remainder of 2023, which were supported by Cleveland Fed Bank President Loretta Mester and Fed Governor Michelle Bowman.
• The US ISM Services PMI matched expectations at 53.6 but remained below the August reading of 54.5. New Orders dropped significantly to 51.8 against the former release of 57.5.

Technical Analysis: Pound Sterling faces volatility contraction near 1.2150

The Pound Sterling demonstrates a volatility squeeze after recovering to near 1.2150. The GBP/USD outlook turns vulnerable as the 50 and 200-day Exponential Moving Averages (EMAs) have delivered a Death Cross, which warrants more downside. A confident downside move could drag the Cable toward the psychological support of 1.2000. Momentum oscillators indicate signs of an oversold situation, but the further downside cannot be ruled out.