The Pound may face pressure with latest recession fears

Daily Currency Update

The Pound advanced against the US Dollar as risk appetite improved last week and despite all areas of the United States non-farm payroll data for December outperforming expectations, it seems that a robust labor demand in the US economy was still factored in by investors.

However, it’s looking like the Pound could lose its strong position, as investors see a tough decision ahead for Bank of England policymakers, who are stuck between deepening recession risks in the UK economy and high inflation.

PMI data indicates that the manufacturing sector continues to face pain due to high interest rates. The outlook for the GBP/USD pair has dampened as US employment results could reshape guidance on interest rates by the US Federal Reserve. 

The Pound remains defensive as investors anticipate a mild recession in the United Kingdom. The country’s economy shrank by 0.1% in the third quarter of 2023. 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 grew at the fastest pace since June. A significant rise in the demand on hopes of lower borrowing costs and economic recovery in 2024 accelerated growth in service activities it was noted.

Despite the stronger-than-expected United States official Employment data for December, adding 216K workers against the 199K jobs created in November, investors saw moderate job gains in December and the Unemployment Rate also remained unchanged, at 3.7%.

This was against expectations of a slight rise to 3.8%. The UK Consumer Credit data revealed an improvement in individuals borrowing in November. Also, the S&P Global/CIPS Composite PMI for December experienced positive signs, with an increase in Services PMI. The call for action has been intensifying for UK policymakers, as corporate executives in the UK are urging the Bank of England to lower interest rates to support. This appeal is seen as an important measure to provide support to the struggling UK economy.