Pound Sterling plummets as UK economy approaches recession

• Pound Sterling drops significantly as investors see the UK economy shifting into a recession.
• UK recession fears deepen as BoE warns about rising corporate default risks.
• Investors await the Jackson Hole Symposium for further guidance.

The Pound Sterling (GBP) witnessed a breakdown of the consolidation formed above 1.2700 as bullish market sentiment failed to neutralize the impact of vulnerable British PMIs reported by S&P Global on Wednesday. The agency reported that factory activities were at their lowest since the pandemic period as firms underutilized their operating capacity due to a bleak demand outlook.

Fears of a recession in the UK economy deepened on Wednesday as warning from Bank of England (BoE) policymakers about significant upside risks to corporate defaults strengthened after the release of vulnerable PMIs. Deepening recession fears are forcing investors to bet on a lower interest rate peak. A poll from Reuters shows that the BoE could pause the rate-tightening spell after an interest rate hike in September.

Daily Digest Market Movers: Pound Sterling falls vertically ahead of Jackson Hole

• Pound Sterling delivers a breakdown of the consolidation formed above the round-level support of 1.2700 as recession fears renewed
• The strength in the Pound Sterling shows that investors are ignoring vulnerable UK preliminary PMI figures for August, reported by S&P Global on Wednesday.
• S&P Global reported UK Manufacturing PMI dropped significantly to 42.5 from estimates of 45.0 and July’s reading of 45.3. This has been the lowest factory data figure since the pandemic period and demonstrates the consequences of higher interest rates by the Bank of England.
• Services PMI shifted into the contraction phase below the 50.0 threshold. The economic data landed at 48.7, lower than estimates of 50.8 and July’s release of 51.3.
• On Tuesday, BoE policymakers warned about significant upside risks to corporate defaults amid higher interest rates. The current tightening cycle by the BoE is aggressive as inflation in the UK is the highest among developed nations.
• A survey from the BoE shows that the share of non-financial UK companies experiencing a weak debt-service coverage ratio will rise to 50% by year-end from last year’s reading of 45%.
• Consistently declining factory PMI indicates that UK firms are not operating at full capacity due to a poor economic outlook.
• Declining PMIs have deepened fears of a recession in the UK economy. This has forced traders to bet on a lower interest rate peak.
• According to a Reuters poll, the BoE will raise interest rates one more time on September 21 by 25 basis points (bps) to 5.50%. A minority of economists expect rates to go even higher.
• Significant upside risks to corporate default and vulnerable PMIs are expected to push the UK economy into a recession sooner but BoE policymakers seem helpless and cannot avoid raising interest rates as price pressures are well in excess of the desired rate of 2%.
• The market sentiment turned bullish after the United States' preliminary PMI remained weaker than anticipated, indicating that the economy is losing its resilience.
• The market mood could turn cautious ahead as the Jackson Hole Symposium will start on Thursday. Federal Reserve (Fed) Chair Jerome Powell is expected to provide an outlook on inflation, interest rates, and the economy.
• The US Dollar Index (DXY) turns sideways around 103.30 after a sell-off move ahead of the Jackson Hole event. Apart from that, investors will keenly focus on the Durable Goods Orders data.
• Former St. Louis Fed President James Bullard said on Tuesday that the US economy faces novel risks of stronger growth. This could warrant higher interest rates from the central bank to keep up the fight against inflation.

Technical Analysis: Pound Sterling recovery fades, declines toward 1.2600

Pound Sterling falls back after a solid recovery move as investors await the Jackson Hole Symposium for further action. The Cable recovered sharply on Wednesday after forming a Triple Bottom chart pattern around 1.2613 but investors capitalized the pullback move as a selling opportunity. For a confident bullish reversal, the asset has to overstep the round-level resistance of 1.2800. The Cable is consistently failing to close above the 20 and 50-day Exponential Moving Averages (EMAs).