Pound Sterling falls as widespread risk-aversion remains intact

• The Pound Sterling falls against the US Dollar to near 1.2750 amid weak appeal for risk-sensitive currencies.
• Investors worry that the US economy could enter a recession.
• The British currency will be guided by market speculation for BoE rate cuts.

The Pound Sterling (GBP) declines to near 1.2750 against the US Dollar (USD) in Tuesday’s London session. The GBP/USD pair weakens as the US Dollar steadies after rebounding from fresh six-month low. The US Dollar Index (DXY), which tracks the greenback’s value against six major currencies, recovers to near 103.00.

The outlook for the US Dollar remains vulnerable as market participants worry about growing speculation of a recession in the United States (US) and an announcement of emergency rate cuts by the Federal Reserve (Fed).

Market expectations of potential US recession grew after a string of weak US economic data. The Unemployment Rate rose to 4.3%, the highest since November 2021, labor demand slowed, and the Manufacturing Purchasing Managers Index (PMI) contracted at a faster pace in July. However, an economy is considered in a technical recession if its Gross Domestic Product (GDP) contracts consecutively for two quarters, which appears the opposite in the US’s case, knowing that the economy expanded at a pace of 2.8% on an annualized basis in the second quarter. The pace at which the US economy grew was double the growth rate recorded for the January-March period.

Also, the US Services PMI, a sector that accounts for two-thirds of the economy, expanded at a faster pace in July after contracting in June. The PMI report showed that activities in the service sector expanded at a faster-than-expected pace of 51.4. Investors anticipated a growth in the Services PMI to 51.0 from the former release of 48.8.

Daily digest market movers: Pound Sterling rises against Yen and Swiss Franc 

• The Pound Sterling remains on the back foot against its major peers but performs strongly against the Japanese Yen (JPY) and the Swiss Franc (CHF), as both faced profit-booking on Tuesday. The British currency continues to face pressure from widespread risk aversion.
• Apart from fears of a US slowdown, a likely all-out war between Israel and Iran has also kept risk sentiment on tenterhooks. Fears of escalating Middle East conflicts were prompted after Iran-backed Hezbollah said it launched dozens of missiles on Israel on Saturday in retaliation to the assassination of Hamas leader Ismail Haniyeh by an Israeli airstrike in Tehran.
• On the domestic front, the Pound Sterling will be guided by market speculation for the Bank of England (BoE) amid an absence of top-tier events. Market participants expect that the BoE could also deliver subsequent rate cuts to fight against the ripple effects of the US slowdown.
• Last week, the BoE cut interest rates by 25 basis points (bps) to 5%, with a 5-4 vote split, as expected. The BoE suggested that the central bank will use a cautious approach in its policy normalization process.

Technical Analysis: Pound Sterling hovers near 1.2750

The Pound Sterling is at a make-or-break near the lower boundary of a Rising Channel chart formation on a daily timeframe. Historically, a pullback move in the aforementioned chart pattern is considered a buying opportunity by market participants.

The GBP/USD pair fell on the back foot after breaking below the crucial support of 1.2900. The Cable is an inch away from the 50-day Exponential Moving Average (EMA) near 1.2790, suggesting uncertainty in the near-term trend.

The 14-day Relative Strength Index (RSI) declines to near 40.00, which is expected to act as a cushion for the momentum oscillator.

On the downside, the round level of 1.2800 will be a crucial support zone for the Pound Sterling bulls. Meanwhile, the two-year high near 1.3140 will be a key resistance zone for the Cable.