Pound Rallies, But Downside Risks Remain

• The British Pound tries to recover below 1.2600 but remains fragile as factory activities continue to weaken.
• UK factory activities fell to 43.0, the lowest reading in 39 months.
• The Bank of England is expected to raise interest rates consecutively for the 15th time this month.

The British Pound (GBP) is struggling to recover significantly after a sharp sell-off, fueled by worsening recessionary risks. The GBP/USD recovery attempt looks tricky as British factory activities face the wrath of the Bank of England’s (BoE) interest rate hike. UK companies have shifted their focus to stabilizing margins and easing cost pressures by cutting inventories and the workforce. In the future, the transfer of cost reduction benefits from companies to the final consumer could alleviate inflationary pressures on households.

Despite mounting recession fears, the BOE cannot stop its monetary policy tightening as the core CPI is very close to its all-time high of 7.1%, and inflation is declining. overall is lower compared to the softer pace of Energy prices. Meanwhile, British Chancellor of the Exchequer Jeremy Hunt is confident that UK inflation will halve from January levels of around 10% by the end of the year.

Daily summary of the movements in the markets: the pound sterling licks its wounds, while the dollar continues without raising its head

• The British Pound discovers an intermediate cushion after a vertical sell-off move below the 1.2600 round level support as investors focus on the interest rate outlook.
• Investors are still waiting for the Bank of England’s interest rate decision this month as rising interest rates dampen economic prospects.
• S&P Global reported on Friday that the UK Factory PMI for August fell to 43.0 from July’s reading of 45.3. The reading was above estimates of 42.3 points. The reading topped estimates of 42.5, but was the lowest in more than three years.
• The UK manufacturing PMI held below the 50.0 threshold for the 13th consecutive month, signaling slower activity growth as companies operate with lower capacity and efficiently to avoid cost pressures.
• Rob Dobson, director of S&P Global Market Intelligence, said production and new orders in the industrial sector contracted at rates rarely seen outside of crisis periods, and companies were being forced to take defensive measures.
• British companies are cutting input purchases and their labor to stabilize margins and control costs.
• The S&P Global Manufacturing report reported that input costs fell at the fastest rate since January, which would ease inflation in the coming months as companies could pass the benefit of low input costs on to consumers. finals.
• Despite the growing risk of recession, the Bank of England is expected to continue raising interest rates as core inflation is very close to its all-time high of 7.1%.
• The BoE is expected to raise interest rates by 25 basis points (bp), to 5.50%, at its September policy meeting. It would be the fifteenth consecutive rise in interest rates by the central bank.
• UK Chancellor of the Exchequer, Jeremy Hunt, declared at the weekend that the Administration is on track to reduce inflation to almost 5% by the end of the year.
• The British authorities’ focus on halving inflation is expected to disappoint members of the ruling Conservative Party, which lobbied hard for tax cuts ahead of the election.
• Market sentiment remains cautious as the dollar continues to attract funds after steady momentum in hiring offset the rise in the unemployment rate in August.
• The US Bureau of Labor Statistics reported that the August unemployment rate jumped sharply to 3.8% versus estimates and the previous release of 3.5%. New Nonfarm Payrolls (NFP) came in at 187,000, above expectations of 170,000 and the July reading of 157,000.
• Wage growth continues to rise, but at a slower rate. Median hourly earnings grew at a slower pace of 0.2% than the expected pace of 0.3%. The slowdown in wage growth could reduce the momentum of consumer spending and ease inflationary pressures to some extent.
• Despite the Federal Reserve’s (Fed) tightening monetary policy, the manufacturing PMI reported by the Institute for Supply Management (ISM) rose to 47.6 last month from 46.4 in July. However, the manufacturing PMI remained below the 50.0 signal, which in turn shows a contraction of activities.

Technical Analysis: The British Pound recovers the level of 1.2600

The British pound is trying to regain resistance at the round level of 1.2600 as the US dollar faces a gradual correction. On Friday, the Pound suffered an intense sell-off after the break of the two-day consolidation formed in the 1.2648-1.2745 range. The Pound is failing to hold above the 20 and 50 day EMAs, indicating that investors are looking at pullbacks as a selling opportunity.