• GBP/USD is continuously trading below 1.2000 amid caution in risk profile ahead of US Manufacturing data.
• The USD Index climbed to near two-week high around 104.40 after a solid recovery from 103.00.
• UK’s corporate debt has declined sharply amid aggressive policy tightening by the BoE.

The GBP/USD pair has shifted its business below the psychological support of 1.2000 in the early Asian session. The Cable has failed in taking control above 1.2000 amid a risk-off market mood. A significant drop in investors’ risk appetite ahead of the United States ISM Manufacturing PMI data and the Federal Reserve (Fed)’s minutes for December monetary policy has strengthened the US Dollar.

S&P500 continued its downside journey on Tuesday, portraying that the risk-aversion theme has been underpinned by the market participants. The US Dollar Index (DXY) climbed to near two-week high of around 104.40 after a solid recovery from 103.00.

Investors are worried that the Federal Reserve (Fed) might need to resort to more policy tightening to contain the stubborn inflation. A note from Bill Dudley, an analyst at Bloomberg, cited three focus areas for the Fed in CY2023. The first one is the tight labor market and lower Unemployment Rate that is propelling wage inflation. Second is underinvestment in the oil and gas sector as Russia could weaponize its hold on major oil supply, which could trigger inflation further. And, the third one is the budget deficit performance which is likely to be around 5% of the Gross Domestic Product (GDP) in 2023.

Meanwhile, investors are awaiting the release of the US ISM Manufacturing PMI for further cues, which is seen lower at 48.5 vs. the former release of 49.0. While the New Orders Index data is seen higher at 48.1 against 47.2 in the prior release.

On the United Kingdom front, falling appetite for corporate debt is raising red flags for economic prospects. According to a quarterly Deloitte CFP survey, 70% of UK CFOs have termed credit as ‘costly’ amid the most aggressive tightening policy by the Bank of England (BoE) in more than 30 years, as reported by Reuters. Meanwhile, the UK administration has removed the requirement of compulsory Covid tests for arrivals from China.