Despite the anticipation of further gains for the pound sterling, business leaders have sent a clear warning that the economic outlook is slowing. As of the end of last week, the GBP/USD pair has been under selling pressure, stabilizing around the 1.3110 level.
In August, business leaders in Britain grew more cautious due to the government's signaling of unpopular policy measures, including reforms to labor rights and taxes targeting investment. The Institute of Directors reported a sharp decline in business investment intentions, marking the steepest drop since the pandemic's onset. The expected number of employees also decreased significantly, highlighting a weakening sentiment among businesses.
The risk for the pound sterling is that this decline in sentiment could affect investment intentions and be reflected in upcoming economic data releases. Analyst David Alexander Meyer from Julius Baer suggests that structural issues and financial headwinds indicate that the recovery may have peaked.
Speculative interest in the pound remains high, with traders holding significant “long” positions, implying optimism for further gains. However, the shift in sentiment among UK policymakers signals that this optimism might deteriorate. Prime Minister Keir Starmer's warning of a “painful” budget and potential tax hikes on fuel, wealth, and capital gains adds to the uncertainty. Businesses fear that new measures to strengthen workers' rights could increase hiring costs and reduce productivity.
The Institute of Directors survey indicates that investment in people and machinery, crucial for economic growth, is at risk of decline due to these political decisions. Economists caution that negative signals from the government could hurt sentiment, possibly pushing the UK toward recession.
Looking forward, the risk for the pound is that current business sentiment may be echoed in upcoming domestic surveys. Specifically, the PMI survey will be crucial in identifying any signs of further deterioration. A drop in confidence could undermine the narrative that the UK economy will continue outperforming the Eurozone, potentially leading to a sharper decline in the GBP/EUR exchange rate.
Technical Forecasts for GBP/USD
The daily chart shows the GBP/USD in a downside correction. Bearish momentum could strengthen if the rate moves towards the 1.3090 and 1.3000 support levels. The pair may remain in its current range until market reactions to the US jobs numbers later this week, which are likely to influence the Federal Reserve's decision on interest rates. We continue to favor selling GBP/USD on any rise.
