Turbulent Times: EU and China Service PMIs Raise Global Growth Concerns, UK Services PMI Improves, GBP/USD Faces Bearish Breakdown

• EU and China Service PMIs drive global growth concerns
• UK Final Services PMI revised higher but downward trend remains
• Fed’s Waller (hawk) says “There is nothing that is saying we need to do anything imminent anytime soon.”

GBP/USD (daily chart) as of Tuesday (9/5/2023) has made a quick and strong breakdown below multiple support levels, indicating a potential bearish breakdown could target the 38.2% Fibonacci level, which resides at 1.2072.  A bearish near-term outlook has been in place over the past month on the decline of both the longstanding bullish support trendline that was in place since last October and below the 50-day SMA.  Price action is currently trading below the 100-day SMA and if downside continues, could target the 200-day SMA at 1.2421.

Upward UK PMI revisions

The British pound pared losses this morning after UK services data came in better-than expected, outperforming what came from the Eurozone and following the downbeat readings from China.  The UK service sector is still in contraction territory, standing at 49.5, but it did buck the trend we saw with the rest of Europe. While the service reading was revised higher from a preliminary reading of 48.7, the downward trend that started in April remains firmly in place.

Central bank expectations

Slowing global growth concerns are sending rate hike expectations lower across the board.  Fed fund futures now are only pricing in a 6.8% chance of a rate hike at the September 20^th meeting and the November 1^st odds are currently at 37.2%. The ECB rate hike odds for the September 14^th meeting are now at 25.5% and the October 26^th meeting has a 25.8% expectation for a rate increase.

Both the BOE and Riksbank are the only central banks (advanced economies) that are close to fully pricing in rate increases at their respective September policy decisions.  The BOE appears poised to deliver two quarter-point rate increases as financial markets price a 97.6% chance of an increase at the September 21^st meeting.

Short-term drivers

The GBP/USD pair reacted positively to Fed’s Waller’s comment that the data doesn’t say we need to do anything imminent.  Waller is considered one of the more hawkish Fed members, so this comment could help convince markets that the Fed is likely done raising rates. It appears that global sentiment will likely be the primary driver here for the British pound, but dollar weakness could emerge if more Fed officials signal the end of tightening has arrived.  If the UK labor market starts to loosen and household spending softens, BOE rate hike odds could come down and that could also fuel further downward pressure on sterling.