• Pound Sterling struggles to find a direction ahead of key data.
• The BoE keeps interest rates steady to safeguard the economy from recession.
• UK Rishi Sunak is expected to fulfill his promise of halving inflation to 5.4% by the year-end.

The Pound Sterling (GBP) trades in a narrow range with the downside cushioned due to improved market sentiment but gains are capped due to the stagnant growth outlook for the UK economy. The near-term demand for the GBP/USD pair depends on the performance of the UK economy in the fourth quarter of 2023.

The latest information about the UK economy, however, indicates that the manufacturing sector continued its downturn in October due to higher borrowing costs and the cost of living crisis. This has set a negative undertone for the growth rate in the October-December period. 

The Bank of England (BoE) held interest rates unchanged at 5.25% on Thursday for the second time in a row so as not to trample on the limited growth there is. There are signs the economy is barely managing to avoid a recession. Business optimism has dipped to a ten-month low, which has forced employers to make deep cuts to payrolls, purchasing, and inventories. In relation to the inflation outlook, BoE Governor Andrew Bailey seems confident that the central bank can bring down inflation to 2% in two years.

Daily Digest Market Movers: Pound Sterling awaits US NFP data

• Pound Sterling trades inside Thursday’s range, demonstrating signs of a sharp contraction in volatility ahead of crucial US data.
• The GBP/USD pair took the steady interest rate decision from the Bank of England (BoE) positively and moved higher to 1.2220.
• BoE policymakers: Megan Greene, Jonathan Haskel, and Katherine Mann voted for a 25 basis points (bps) rate hike while the other six policymakers advocated for maintaining the status quo.
• The upside in the Pound Sterling remained restricted as the decision to keep interest rates unchanged at 5.25% by the BoE, was taken mainly because of fears the economy could tip into a recession.
• The growth rate in the forward quarters is expected to remain stagnant due to Middle East tensions, deteriorating labor demand, weak demand outlook, poor consumer spending, and poor housing market.
• S&P Global reported that the UK manufacturing downturn continued at the start of the final quarter of the year, meaning the factory sector remains a weight dragging on an economy already skirting with recession.
• Over the interest rate guidance, BoE Governor Andrew Bailey warned that the central bank will keep interest rates elevated long enough to squeeze out excess price pressures above the 2% inflation target.
• Andrew Bailey kept the door open for further policy-tightening and ruled out rate cut hopes in the near term as inflation in the UK economy is the highest among G7 economies.
• The BoE’s inflation forecast was for headline inflation to soften to 4.6% by Q4 of 2023. Inflation in the one-to-two-year timeframe is seen easing to 3.1% and 1.9% respectively. 
• Fresh inflation projections by the central bank indicate that UK Prime Minister Rishi Sunak will fulfill his promise of halving inflation to 5.4% by the year-end.
• Meanwhile, deepening Middle East tensions are keeping global economies on their toes. The Israeli army has confirmed that their troops have encircled Gaza and a ceasefire is not likely at all.
• US Secretary of State Anthony Blinken has arrived in Israel for talks to pause a ground invasion by the Israeli Defence Forces (IDF) for a secured dispatch of humanitarian aid and to take concrete steps for protecting hostages.
• The US Dollar turns sideways as investors await the US Nonfarm Payrolls (NFP) data for October, which will be published at 12:30 GMT.
• As per the projections, US employers are expected to have hired 180K workers in October against what was a surprisingly higher reading of 336K in September. The Unemployment Rate is seen unchanged at 3.8%.
• Investors will keenly watch Average Hourly Earnings, which is a measure of wage inflation, for interest rate guidance. On a monthly basis, Average Hourly Earnings are seen expanding at a higher rate of 0.3%, as against a 0.2% increase in September. The annual data is seen decelerating to 4.0% versus former reading of 4.2%.

Technical Analysis: Pound Sterling experiences volatility squeeze below 1.2200

Pound Sterling demonstrates a symmetrical triangle pattern formation on the daily timeframe, which indicates a significant contraction in volatility. The upside in the GBP/USD pair would be capped around 1.2230 while the downside will be cushioned near 1.2100. The Cable attempts to stabilize above the 20-day Exponential Moving Average (EMA) at 1.2186. If the GBP/USD pair manages to do so, the near-term demand for the Pound Sterling is likely to turn positive.