Pound Sterling capitalizes on improved market mood, UK Services PMI in focus

• Pound Sterling bounces back as market sentiment seems to be improving again.
• Deepening UK recession fears could weaken the Pound Sterling.
• Investors await UK Services PMI and US ADP Employment data for further action.

The Pound Sterling (GBP) finds some support on Thursday, trading at around 1.2686 in the early European session, as market sentiment seems to be improving again after a subdued beginning of the year for risk assets. The GBP/USD pair aims to recover further as discussions about rate cuts from the Federal Reserve (Fed) look firm while the Bank of England (BoE) is still emphasizing the need to keep interest rates higher for a longer period. 

The recovery move in the Pound Sterling seems a temporary cushion as the United Kingdom could enter a mild recession. The outlook of the economy is gloomy amid tough conditions over credit and household demand, which could force BoE policymakers to unwind their restrictive monetary policy stance earlier than anticipated.

Daily Digest Market Movers: Pound Sterling rebounds as US Dollar corrects 

• Pound Sterling recovers from 1.2600 as the risk-appetite of the market participants improve again, with US equity futures slightly in the green after ending two sessions with losses.
• Market sentiment seems to be improving after the Federal Reserve’s  FOMC minutes, released on Wednesday, indicated that policymakers were cautious about an “overly restrictive” monetary policy stance.
• The Fed minutes indicated that interest rate cuts are on the cards, but the timing is uncertain.
• Fed policymakers were confident about taming inflation without triggering a recession.
• Meanwhile, improved market sentiment has provided a near-term cushion to the Pound Sterling but domestic uncertainties weigh. 
• This week, the Manufacturing PMI  reported by S&P Global dropped to 46.2 against the preliminary reading of 46.4, signaling the effects from  high inflation and interest rates in the domestic and overseas markets.
• Business optimism dropped further due to soft orders amid a deepening cost of living crisis. Business investment also remains poor as borrowing costs are high.
• The UK economy is exposed to a technical recession after the country’s Gross Domestic Product (GDP) contracted by 0.1% in the third quarter of 2023. The likelihood of another fall in the fourth quarter is significant.  In its latest projections, the Bank of England said that it is not expecting any growth ahead.
• The BoE is facing a balancing act between saving the economy from shifting into a recession or cooling down still-high inflationary pressures. 
• Underlying inflation in the UK is more than double the required rate of 2%, forcing policymakers to stick with the restrictive monetary policy stance.
• Going forward, action in the Pound Sterling will be guided by the S&P Global Composite and Services PMI for December, which will be published at 09:30 GMT.
• As per the estimates, the Composite and Services PMI are seen unchanged from their preliminary readings at 51.7 and 52.7, respectively.
• Meanwhile, the US Dollar Index (DXY) fell after printing a fresh two-week high at 102.72 as prospects of rate cuts by the Fed persisted after the release of the FOMC minutes.
• Investors now shift focus towards the ADP Employment Change for December, which will be published at 13:15 GMT. According to the estimates, private US employers hired 115K workers in December, against 103K payrolls in November.

Technical Analysis: Pound Sterling bounces from 1.2600

The Pound Sterling rebounds significantly after finding buying interest near the round-level support of 1.2600. The GBP/USD pair aims to extend its recovery as the market mood is improving. The Cable bounces back after correcting to near the 20-day Exponential Moving Average (EMA) around 1.2660.