Pound Sterling recovers though UK recession risks still a concern

• Pound Sterling aims to climb above 1.22 as market mood remains quiet.
• UK economic activities were broadly vulnerable in September due to poor domestic and overseas demand.
• BoE’s Broadbent remains confident about achieving price stability in two years.

The Pound Sterling (GBP) has become subdued after a three-day range high as investors seem baffled about the United Kingdom’s inflation and economic outlook following September’s PMI data. UK firms were reluctant to utilize their full capacity and reduced hiring as higher interest rates by the Bank of England (BoE) have hit demand significantly.

Investors are not anticipating a quick revival in the UK’s overall demand as the BoE vowed to keep interest rates higher for a longer period to ensure price stability. BoE Deputy Governor Ben Broadbent sees inflation coming down to 2% in two years as restrictive monetary policy has dampened labor market and economic prospects.

Daily Digest Market Movers: Pound Sterling remains sideways amid quiet market mood

• Pound Sterling faces nominal selling pressure from three-day high of 1.2196 as the market mood turns quiet ahead of crucial labor market data.
• The GBP/USD pair struggles to extend its upside as investors remain worried about the UK’s economic outlook due to declining labor demand and weakening economic activities.
• In September, the UK Manufacturing and Construction PMIs remained vulnerable as firms cut back on inventories and labor due to declining demand from domestic and overseas markets. The Services PMI improved significantly but remained below the 50.0 threshold.
• The labor demand from UK firms has slowed due to higher wage growth. Firms restricted them from filling voluntary resignations as the cost of bringing fresh talent is extremely high.
• Few businesses remained optimistic, as surveyed by S&P Global in the PMI data, as the Bank of England has paused policy tightening, but firms with higher dependency on debt are still pessimistic.
• On Thursday,  S&P Global reported the UK Construction PMI at 45.0 in September, much lower than expectations of 49.9 and the former release of 50.8. A figure below the 50.0 threshold is considered a contraction.
• A decline in construction spending was widely anticipated as higher mortgage rates have forced households to postpone their demand for new houses. However, the impact of weak Construction PMI data is expected to remain limited as it is relatively a smaller part of the UK economy.
• Meanwhile, a positive outlook on progress in declining inflation from BoE Governor Andrew Bailey and Deputy Governor Ben Broadbent has brought relief for investors.
• This week, Andrew Bailey opposed changing the 2% inflation target and remained optimistic about bringing down inflation to 5% or below by year-end.
• Ben Broadbent sees achievement of price stability in two years. He further added that there are “clear signs” that higher interest rates have hit demand and elevated the Unemployment Rate.
• Meanwhile, the US Dollar delivers a pullback move to near 106.54 from a four-day low around 106.30 as investors turn anxious ahead of the US Nonfarm Payrolls (NFP), which will shape the interest rate outlook for the remainder of 2023.
• Analysts at Commerzbank forecast job growth of 160K. After the surprisingly sharp rise from 3.5% to 3.8% in August, the unemployment rate is likely to have fallen again slightly to 3.7%, as the trend in labor force growth is only around 100K. We do not expect the Unemployment Rate to rise significantly until next year when the economy is likely to slip into recession and employment is likely to shrink.

Technical Analysis: Pound Sterling faces barricades near 1.2200

Pound Sterling struggles to extend upside above the immediate resistance of 1.2200 amid quiet market mood. The recovery move in the GBP/USD pair came after momentum oscillators turned oversold on the daily time frame. The broader outlook of the GBP/USD pair is bearish as the 50 and 200-day Exponential Moving Averages (EMAs) have delivered a Death Cross near 1.2450. A confident downside move could drag the Cable toward the psychological support of 1.2000.