GBP/USD Experiences Sharp Decline on Risk-Off Sentiment and Weak

GBP/USD Experiences Sharp Decline on Risk-Off Sentiment and Weak Manufacturing Data

Pound faced an intense sell-off following the release of unfavorable manufacturing activity data and risk-off sentiment in the markets. The GBP/USD pair, which had recently reached a two-week high, witnessed a substantial drop as the United Kingdom's economic outlook dimmed due to a second consecutive contraction in factory output. The market mood was further dampened by persistent US inflation data, negatively impacting risk appetite.

UK's manufacturing and overall industrial production both declined in August as companies reduced their spending on labor and inventory, influenced by a bleak demand outlook. This less favorable economic environment is contributing to the GBP's sell-off.

The risk-off sentiment in the market is anticipated to persist, as reflected in comments by Bank of England (BoE) policymaker Swati Dhingra, who suggested a rate cut might be necessary if economic growth continues to fall below expectations. The UK is currently facing several challenges that set it apart from other G7 economies, including higher interest rates, complex trade relations with the European Union, and rising gasoline prices.

While GBP/USD is in the process of retracing some of its recent losses, it still faces headwinds due to optimistic economic data from the United States (US). The US Consumer Price Index (CPI) for September, reported by the US Bureau of Labor Statistics (BLS), surpassed expectations, with annual figures consistently expanding at a rate of 3.7%, slightly outperforming the estimated 3.6%. This robust inflation data indicates the persistence of price pressures.

Additionally, the Initial Jobless Claims for the week ending on October 6 displayed a nuanced trend. Although the figure saw a modest increase to 209K, it was slightly below the forecast of 210K, signaling a mild improvement in the job market.

In contrast, UK economic data failed to boost confidence in the Pound Sterling (GBP) on Thursday. Both Manufacturing Production and Industrial Production figures fell short of expectations. Manufacturing Production declined by 0.8% in August, missing the forecast of a 0.4% decline, after a previous month's dip of 1.2%. Industrial Production also missed estimates, registering a 0.7% decline instead of the anticipated 0.2% decrease, with the prior reading being revised to a 1.1% decline.

Furthermore, the Bank of England (BoE) revised its growth forecast for the July-September period from 0.4% to a mere 0.1%, signaling a reluctance to pursue further rate increases. Market participants will closely monitor the US Michigan Consumer Sentiment Index and a speech by BoE Governor Andrew Bailey on Friday for additional insights into the economic outlook in both countries.

From a technical standpoint, the price may reach the 38.2% and 61.8% Fibonacci retracement levels to fill the fair value gap. However, an imminent price decline could drive it directly towards the predefined take-profit levels.

Our preference

Short positions below 38.2% and 61.8% for a Pullback and Stop loss 1.23500 Targets at 1.21500 & 1.20500 in extension.

Trade closed: target reached: