In Thursday’s European session, the Pound Sterling (GBP) continued its upward trajectory, reaching 1.2480 against the US Dollar (USD). This ascent in the GBP/USD pair was propelled by a pronounced correction in the US Dollar and mounting anticipation that the Bank of England (BoE) would defer rate cuts until its November meeting. Similar to the Federal Reserve (Fed), the BoE is anticipated to postpone rate adjustments, alleviating concerns regarding policy divergence between the two central banks.
A significant factor influencing traders’ reevaluation of BoE rate cut expectations is the sluggish progress in inflation‘s descent towards the 2% target, attributed to consistent wage growth. Data from the labor market report for the quarter ending February revealed a steady 5.6% increase in Average Earnings, including bonuses, surpassing forecasts of 5.5%. To facilitate a return to the 2% inflation target, annual wage growth excluding bonuses ideally approaches 3.5%, with heightened wage growth contributing to inflationary pressures as businesses transfer labor costs to consumers and households with augmented disposable income stimulate overall demand.
Market sentiment on Thursday reflected a shift, with the Pound Sterling advancing to 1.2480 as traders recalibrated expectations of BoE rate cuts in the upcoming September meeting. The lingering journey for inflation to reach the 2% target is anticipated to be fraught with challenges. Presently, financial markets are pricing in a single interest rate reduction by the BoE, expected to occur in November.
March’s UK inflation data underscored this recalibration, as annual core Consumer Price Index (CPI) growth, excluding volatile food and energy prices, expanded by 4.2% year-over-year, exceeding consensus estimates of 4.1%. However, this growth marked a notable deceleration from February’s 4.5% reading. Core inflation metrics serve as the BoE’s primary gauge for interest rate decisions. The combination of modest declines in price pressures for March and consistent wage growth for the three months ending February prompted traders to temper expectations of rate cuts in September.
BoE Governor Andrew Bailey expressed confidence in February’s inflation trajectory, foreseeing a further decline in inflation in the following month. Regarding Middle East tensions, Bailey noted that oil prices had not surged as anticipated, and the ramifications of geopolitical tensions were less severe than feared.
Beyond revisions in BoE rate cut projections, the GBP/USD pair capitalized on a minor correction in the US Dollar. The US Dollar Index (DXY), tracking the USD against six major currencies, retreated to 105.75 from a recent five-month peak of 106.40. However, near-term demand for the US Dollar persists, with Fed policymakers emphasizing the necessity for higher interest rates until convinced of sustainable inflation return to the 2% target.
In technical analysis, the Pound Sterling aims to establish solid ground after encountering robust buying interest near the pivotal support level of 1.2400. Rebounding from this level, the GBP/USD pair sets its sights on reclaiming the psychological resistance at 1.2500. Despite this upward momentum, the near-term outlook for the Cable remains bearish, marked by the breakdown of the Head and Shoulders pattern and a declining 20-day Exponential Moving Average (EMA) hovering around 1.2560. Additionally, the 14-period Relative Strength Index (RSI) oscillates within the bearish range of 20.00-40.00, signaling downward-leaning momentum.
