GBP/USD Threatens Key Support after UK Services Sector Contraction

GBP/USD Analysis

Friday's report indicated that the US labor market is coming into better balance, with unemployment rising to 3.8% in August, wage growth easing and soft job gains. This bolstered market expectations for a Fed pause later this month and the view that the terminal rate has been reached, but the pair entered the second straight losing month.

Employment conditions are still tight and last week's data also showed an increase in both headline and core PCE inflation measures in July. This sustains prospects for prolonged restrictive stance by the Fed and Chair Powell has kept more hikes on the table.

On the other side of the Atlantic, today's PMI release from the UK revealed that services activity contracted in August, for the first time since the start of the year, despite coming in better than expected. The services sector is the biggest contributor to the country's output and today's release highlights the challenging state of the economy.

Data such as these, may create some apprehension to BoE policy makers around further tightening and along with broader demand for the greenback, GBP/USD extends its losses today. It threatens the pivotal 200Days EMA and the 50% Fibonacci of this year's low/high advance and a breach would expose it to 1.2307.

On the other hand, BoE officials will have a hard time staying on the sidelines as high inflation and pay growth keep the pressure for more rate hikes. However, the UK central bank has been tightening non-stop since December 2021 and more action increases chances for economic slowdown and a mortgage crisis, so the Pound may not be able to continue eliciting strength for this theme.

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In any case, the drop looks stretched and GBP/USD already tries to find support at the aforementioned key tech levels. A rebound to another critical confluence (EMA200 and daily Ichimoku Cloud) at 1.2710-30 would not be surprising, but does the Pound not inspire confidence at this stage for further gains and an exit on the other side of the cloud.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

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