The Pound Sterling (GBP) faced a lack of direction on Friday, as investors awaited guidance on Bank of England (BoE) interest rates. The GBP/USD pair traded sideways, reflecting a market characterized by subdued sentiment. The trajectory of the Pound Sterling is expected to be influenced by market expectations regarding potential BoE rate cuts.
Ongoing uncertainty surrounding the timing of BoE rate adjustments persists, with investors speculating on a possible reduction in interest rates in the early part of the second half of this year. As of now, the likelihood of a rate cut in the June policy meeting stands below 50%, while a dovish decision in August appears increasingly probable.
BoE Governor Andrew Bailey’s recent comments suggested that price pressures are anticipated to align with the 2% target in spring before experiencing an upward trajectory. This may pave the way for the BoE to consider a significant adjustment of its historically restrictive monetary policy.
In contrast, the US Dollar exhibited a sideways trend after a v-shaped recovery driven by tightening labor market conditions. Jobless claims for the week ending February 16 were lower than expected at 201K, signaling a positive labor market, while Federal Reserve (Fed) policymakers reiterated the need for additional evidence to confirm a decline in inflation to the 2% target.
The Pound Sterling’s daily movements were encapsulated in a tight range around 1.2650, reflecting investors’ eagerness for fresh insights into the interest-rate outlook. BoE policymakers have adopted a slightly dovish stance on interest-rate prospects, attributing it to the deepening cost of living crisis. There is a noticeable shift in focus towards the duration interest rates will remain at current levels, indicating that the existing monetary policy is deemed sufficiently restrictive.
Governor Andrew Bailey, in his testimony before the UK Parliament’s Treasury Select Committee, emphasized that the BoE doesn’t require inflation to reach the 2% target to consider interest rate reductions. Bailey acknowledged that market expectations of rate cuts are not deemed “unreasonable.”
This week, BoE policymaker Swati Dhingra warned that a delayed rate-cut decision could result in a hard landing, signifying a sharp economic contraction if rates remain too high amid easing price pressures.
On the economic front, the S&P Global/CIPS reported mixed preliminary data for February, indicating a possible end to the technical recession observed in the second half of 2023 in the UK economy. However, disruptions in supply chains due to the Red Sea crisis and increased shipping costs remain concerns.
Market sentiment, overall, has been subdued, with the US Dollar Index hovering near 104.00. Safe-haven assets gained appeal on Thursday amid the deepening Middle East crisis and hawkish remarks in the Federal Open Market Committee (FOMC) minutes of the January policy meeting.
In technical analysis, Pound Sterling trades within Thursday’s range, exhibiting a sideways trend in the Descending Triangle pattern on a daily timeframe. The pattern suggests market indecisiveness, leaning slightly negative due to the formation of lower highs. The pair maintains positions above the 20 and 50-day Exponential Moving Averages (EMAs) around 1.2630, with the 14-period Relative Strength Index (RSI) indicating a sharp contraction in volatility within the 40.00-60.00 range. The downward-sloping border of the Descending Triangle is traced from the December 28 high at 1.2827, while horizontal support is anchored near 1.2500 from the December 13 low. Investors remain attentive to potential indicators amid the current subdued market sentiment.
