- Despite the financial markets being positioned for further gains by the pound sterling, business leaders have sent the first clear warning signal that the outlook is slowing.
- As of the end of last week, the GBP/USD has been moving since the beginning of this important trading week amid selling pressure, stabilizing around the 1.3110 level at the time of writing.
Business leaders in Britain have become more cautious in August as the new government has signalled a range of unpopular policy measures, including Labor rights reforms and taxes that would target investment. Furthermore, a survey by the Institute of Directors of British business leaders revealed the sharpest decline in business investment intentions since the start of the pandemic lockdowns. The expected number of employees also fell by 14 points, from +24 to +10 - this was also the sharpest decline since the first pandemic lockdown.
For the pound sterling, the risk is that the deterioration in sentiment among business leaders will affect investment intentions and be reflected in official economic data releases in the coming months. In this regard, David Alexander Meyer, an analyst at Julius Baer, said in a monthly forecast update on the pound sterling outlook: "Structural issues and financial headwinds suggest that the best of the recovery is over."
These developments come amid increased speculative interest in the pound sterling, with new positioning data showing that traders have rebuilt their "long" position on the pound sterling, suggesting that the community believes that further gains are possible. However, there are many variables that drive the currency, and many continue to support the pound sterling, but the sudden shift in sentiment among UK policymakers sends a message that this optimism could deteriorate.
UK Prime Minister Keir Starmer last week prepared for an October tax-raising budget, warning that it would be "painful" and that "those with broader shoulders should bear the heavier burden." Press speculation suggests that the British government will raise fuel tax and wealth taxes, while an increase in capital gains tax is almost certain. The government has also revealed that it will introduce a set of measures that will strengthen workers' rights. For businesses, the fear is that this will increase the cost of hiring employees while also reducing employee productivity.
The Institute of Directors survey shows that business investment in people and machinery, a key pillar of economic growth, is at risk of deteriorating as a result of Labour’s plans. Moreover, Economists say the negative messages from the new government risk damaging sentiment and pushing the UK into recession. Added, “The economic outlook depends on fundamentals, political choices and confidence. Therefore, the loss of confidence is preventing people from spending or businesses from investing. Realism is required but the right balance needs to be struck. Don’t sell yourself short on the downside.”
Meanwhile, the risk for the pound is that the sentiment we have seen among businesses is reflected in other domestic surveys due in September. In particular, we will be watching the PMI survey for clearer signs of deterioration. Any decline in confidence risks spoiling the narrative that the UK economy is set to continue outperforming the Eurozone, which could lead to a deeper decline in the GBP/EUR exchange rate in the coming weeks.
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Technical forecasts for the GBP/USD pair today:
Based on the daily chart attached, the GBP/USD rate remains in a downside correction. Technically, the bears will tighten their grip on the trend if it moves towards the 1.3090 and 1.3000 support levels respectively. The GBP/USD may remain in its current range until the markets and investors react to the announcement of the US jobs numbers at the end of the week, which strongly and directly affects the decisions of the US Federal Reserve Bank this month regarding the widely expected US interest rate cut. Ultimately, we still prefer to sell the GBP/USD from every level of the rise.
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