GBP/USD trades cautiously ahead of US Manufacturing data

The Dollar Index climbed to near two-week high around 104.65 after a solid recovery from 103.00. The GBP/USD pair has shifted its performance below the psychological support of 1.2000 in the early Asian session.

The pair failed in taking control above the 1.2000 mark amid risk aversion. A significant drop in investors’ risk appetite is seen ahead of the US ISM Manufacturing PMI data and the FOMC minutes for December monetary policy.

S&P500 continued its downside track on Tuesday, reflecting the risk-aversion. Investors are worried that the Fed may resort to more policy tightening to contain the stubborn inflation in the United States.

Three focus areas for the Fed in 2023 could include:

1. Tight labour market and lower Unemployment Rate that is propelling wage inflation.

2. Underinvestment in the oil and gas sector as Russia could weaponize its energy supplies, to bring about extra inflation.

3.The budget deficit performance which is likely to be around 5% of the Gross Domestic Product (GDP) in 2023.

Investors are awaiting the US ISM Manufacturing PMI data for further cues, which is seen lower at 48.5 vs. the former release of 49.0. While the New Orders Index data is seen higher at 48.1 against 47.2 in the prior release.

On the UK front, falling appetite for corporate debt is raising red flags for economic prospects. According to a quarterly Deloitte CFP survey, 70% of UK CFOs termed credit as costly during a time witnessing the most aggressive tightening policy by the British central bank in more than 30 years.

Inflation is a persisting topic as the current rate exceeds 10%; over five times as much as the BoE’s target rate of 2%. This is forcing the BoE to hike interest rates to counter the increasing inflation levels, but this comes at a time of a cost-of-living crises and a prolonged recession being forecasted so 2023 could be another busy year for the Pound.

The Pound fell against the dollar, which swept higher against a range of currencies on Tuesday, while British manufacturers reported one of the sharpest falls in activity in over a decade.

The pound was down 1% to $1.19320, its biggest drop since mid-December, and was 0.1% higher against the euro, trading at 88.41. The downward swing can be attributed to a stronger dollar rather than UK-specific factors. One logical evidence is that eur/usd, usd/jpy etc. have shown similar price action since Tuesday’s openings.