Pound Sterling faces pressure amid sour market mood ahead of key US labor market data

• The Pound Sterling falls back as investors shift their focus to the US Nonfarm Payrolls data.
• While the UK manufacturing sector continues to face pressure, the services sector outperformed in December, according to PMI figures.
• The US Dollar Index recovers swiftly, fueled by upbeat US data.

The Pound Sterling (GBP) struggles for a firm footing on Friday, trading at around 1.2670 against the US Dollar in the early European session,  as markets’ risk appetite gets sapped amid the uncertainty ahead of critical US economic data. The GBP/USD pair faces a sharp sell-off as the US Dollar recovers and investors see tough decisions ahead for Bank of England (BoE) policymakers, who are stuck between deepening recession risks in the UK economy and high underlying inflation.

The likelihood of a technical recession in the UK economy is high as it contracted in the third quarter and a stagnant performance is anticipated for the final quarter. Also, recent PMI data signaled that the manufacturing sector continues to face pain due to high interest rates.

Further action in the GBP/USD pair will be guided by the Nonfarm Payrolls data of the United States for December, which will be published at 13:30 GMT. The outlook for the GBP/USD pair could improve if the data showed that the US labor market is cooling further, although employment-related indicators such as ADP, job openings and jobless claims have come in better than expected.

Daily Digest Market Movers: Waiting for Nonfarm Payrolls

• The Pound Sterling has dropped to near 1.2670 against the US Dollar after correcting from a two-day high of 1.2730 amid caution ahead of the crucial United States official Employment data for December.
• Investors see moderate job gains in December. As per the consensus, US employers are expected to have added 170K workers against the 199K jobs created in November.
• The Unemployment Rate is seen edging up to 3.8% versus the former reading of 3.7% as labor market conditions have cooled down.
• Investors will also watch the pay growth data, which has been a major driver of inflation in the US economy.
• Investors anticipate Average Hourly Earnings to grow at a slower 0.3% pace in December against 0.4% in November on a monthly basis. The annual wage growth is seen decelerating to 3.9% against the prior reading of 4.0%.
• Bets in favour of a rate cut by the Federal Reserve in March are likely to escalate if labor market conditions soften more than projected.
• The US Dollar Index (DXY) has rebounded after discovering support near 102.20, supported by recent upbeat labor market data and as investors rush back to safe-haven assets ahead of US labor market data.
• Meanwhile, the Pound Sterling remains on the back foot as investors anticipate a mild recession in the United Kingdom. The country’s economy shrank by 0.1% in the third quarter of 2023.
• Bank of England policymakers remain on a balancing act as an early rate cut decision to skirt a recession could fuel inflationary pressures.
• While the UK’s manufacturing sector continues to remain in a contraction phase due to tough conditions in the domestic and overseas markets, the Services PMI – which gauges activity in the services sector – expanded at the fastest pace since June. 
• S&P Global reported on Thursday that the Services PMI rose to 53.4 in December against expectations of 52.7 and the former reading of 50.9.
• A significant rise in client demand on hopes of lower borrowing costs and economic recovery in 2024 accelerated growth in service activities, S&P Global said.

Technical Analysis: Pound Sterling drops to near 1.2670

The Pound Sterling falls sharply after failing to extend recovery above the crucial resistance of 1.2720. The GBP/USD pair is expected to find intermediate support near 1.2625, but this will result in a head and shoulder chart pattern formation on an intraday timeframe. A breakdown of the pattern would result in a fresh downside move towards the three-week low of 1.2500. 

Broader strength in the GBP/USD pair has started fading as it is struggling to sustain above the 20-day Exponential Moving Average (EMA) at 1.2660. Momentum oscillators indicate a sideways performance ahead.