The Pound Sterling (GBP) experienced heightened volatility during Wednesday’s London session following the release of softer-than-anticipated Consumer Price Index (CPI) data by the United Kingdom Office for National Statistics (ONS). Both annual headline and core inflation figures decelerated, reaching 3.4% and 4.5%, respectively. This downturn in inflation is anticipated to prompt Bank of England (BoE) policymakers to entertain the notion of earlier interest rate cuts than previously anticipated by market participants.
Market observers are advised to prepare for continued Pound Sterling volatility as the BoE prepares to unveil its second monetary policy decision of 2024 on Thursday. While investors expect the BoE to maintain interest rates at 5.25%, the subdued inflation data could prompt policymakers to adopt a slightly dovish stance on interest rates.
Simultaneously, investor sentiment remains cautious ahead of the Federal Reserve’s policy meeting, scheduled for announcement at 18:00 GMT. Of particular interest are the quarterly updated dot plot and economic projections, with the Fed widely expected to maintain interest rates within the range of 5.25% to 5.50%.
Market Movers Analysis: Pound Sterling Faces Downside Pressure Amid Economic Headwinds
The Pound Sterling is poised to encounter downward pressure following the release of softer-than-expected consumer price inflation data for February. Annual headline inflation notably decelerated to 3.4%, below the projected 3.6% and the prior reading of 4.0%. Additionally, the monthly headline CPI, which rebounded by 0.6%, fell short of expectations set at 0.7%.
Annual core CPI, a metric excluding volatile food and energy prices, softened to 4.5% from estimates of 4.6% and the previous reading of 5.1%. This core inflation data is typically favored by BoE policymakers for decision-making on interest rates, with soft figures potentially bolstering confidence in achieving the desired inflation target of 2%. The current stance of BoE policymakers emphasizes rate cuts only if convinced that inflation will sustainably return to target levels.
Expectations for continued Pound Sterling volatility persist as focus shifts to the Bank of England’s impending interest rate decision, where rates are anticipated to remain unchanged at 5.25%. However, investors will scrutinize signals regarding potential rate reductions, with hopes pinned on a start date possibly as early as the August meeting, a sentiment reinforced by Wednesday’s soft inflation data.
Meanwhile, cautious market sentiment prevails ahead of the Federal Reserve’s monetary policy decision, with the central bank expected to maintain interest rates within the 5.25%-5.50% range. Given the pre-priced status of no changes to interest rates, attention turns to the monetary policy statement, Fed Chair Jerome Powell’s press conference, and the forthcoming dot plot and economic projections.
Technical Analysis: Pound Sterling Encounters Resistance Near 20-EMA
The Pound Sterling encounters interim support around the breakout region of the Descending Triangle near 1.2700. However, sustaining above the 20-day Exponential Moving Average (EMA) at approximately 1.2730 poses a challenge for the GBP/USD pair, indicating uncertain near-term demand.
Downward pressure is cushioned by the descending border of the Descending Triangle chart pattern, acting as support for the Pound Sterling. Conversely, a significant barrier at the seven-month high around 1.2900 presents an obstacle for the Cable’s upward movement.
The 14-period Relative Strength Index (RSI) reflects a sharp volatility contraction, returning to the 40.00-60.00 range, underscoring the Pound Sterling’s current market dynamics.
