Sterling slips as Construction PMI falters

The British pound has extended its losses on Friday. In the European session, GBP/USD is trading at 1.1847, down 0.52%.

Construction PMI declines

It has been a tough start to the year for the pound, which is down 2% against the dollar this week and is trading at 6-week lows. There was no relief today for the pound, as Construction PMI fell into negative territory in December, after three months of growth. The PMI slowed to 48.8, down from 50.4 in December, its lowest level since May 2020.

The weak Construction PMI is yet another indication that the UK economy is likely in a recession. Such a grim economic landscape is far from ideal for the Bank of England to continue raising interest rates, but the Bank views high inflation as even worse than a recession. The BoE meets next on February 2^nd and is expected to raise rates.

The first week of the year wraps up with the US employment report, with the spotlight on nonfarm payrolls and wage growth. Unemployment claims and other employment indicators show that the labour market remains resilient and there is a strong demand for workers despite a slowing economy. The ADP employment report, although not considered a reliable indicator, jumped to 235,000 in December, crushing the previous reading of 127,000 and the estimate of 150,000. The markets expect nonfarm payrolls to move in the opposite direction, with an estimate of 200,000, down from 263,000 in November. Wage growth is expected to inch lower to 5.0% y/y in December, down from 5.1% a month earlier.

The Fed is of the view that the labour market must weaken in order for inflation to fall. For this reason, the Fed wants to see nonfarm payrolls and wages to fall. The problem is that the markets, who are always hoping for a dovish pivot, might react to weak employment news by loosening conditions, which the Fed has warned would complicate its fight against inflation.

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GBP/USD Technical

• GBP/USD is putting pressure on 1.1832 and could test this line today. The next support level is 1.1726
• There is resistance at 1.1913 and 1.2026

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