In Monday’s London session, the Pound Sterling (GBP) demonstrated strength, holding above the psychological support level of 1.2500 against the US Dollar (USD). The GBP/USD pair maintained its ground as the US Dollar grappled with higher-than-expected Initial Jobless Claims for the week ending May 3, sparking concerns regarding the health of the US labor market.
The confidence of financial markets in the possibility of the US Federal Reserve (Fed) initiating interest rate cuts from the September meeting has surged, given the cooling down of US labor market conditions. Attention now turns to the US Consumer Price Index (CPI) data for April, scheduled for release on Wednesday.
Projections indicate a softening of the annual headline CPI to 3.4% from 3.5% in March, with core inflation, excluding volatile food and energy prices, expected to decelerate to 3.6% from the previous reading of 3.8%. Economists anticipate a slower monthly growth in both headline and core CPI, from 0.4% to 0.3%.
Daily Market Digest: Pound Sterling Gains Momentum on Favorable Factors
The Pound Sterling’s strength is bolstered by robust UK Q1 Gross Domestic Product (GDP) data released on Friday. The United Kingdom Office for National Statistics (ONS) reported a stronger-than-expected expansion of 0.6%, surpassing estimates of 0.4%. This positive development marks the end of the technical recession witnessed in the latter half of 2023.
Following the GDP data release, UK Chancellor Jeremy Hunt remarked, “There is no doubt it has been a difficult few years, but today’s growth figures are proof that the economy is returning to full health for the first time since the pandemic,” as per Reuters.
The resilience of the UK economy faces further scrutiny with the upcoming release of labor market data on Tuesday. Economists anticipate a rise in the ILO Unemployment Rate for the three months ending March to 4.3% from the previous reading of 4.2%. Additionally, investors await the Average Earnings data, crucial for gauging service inflation trends.
Annual Average Earnings Including Bonuses are forecasted to decelerate to 5.3% in the three months ending March from the previous reading of 5.6%. A significant slowdown in wage growth momentum could heighten expectations for the Bank of England (BoE) to commence interest rate reductions in June.
The BoE, which maintained interest rates steady at 5.25% for the sixth consecutive time last week, signaled a swift inclination towards policy normalization. BoE Deputy Governor Dave Ramsden, alongside policymaker Swati Dhingra, voted for a 25 basis points (bps) rate cut to 5.0%. During the press conference, BoE Governor Andrew Bailey hinted at the potential for more rate cuts than anticipated by investors.
Technical Analysis: Pound Sterling Resilience
The Pound Sterling rallied to 1.2540 on Monday, propelled by various supportive factors. Notably, the GBP/USD pair staged a robust recovery from the 50% Fibonacci retracement level, located around 1.2470 (plotted from April 22 low of 1.2299 to May 3 high of 1.2634).
Persisting close to the 20-day Exponential Moving Average (EMA) near 1.2520, the Cable suggests a sideways trend. However, it remains below the neckline of the Head and Shoulder (H&S) chart pattern formed on a daily timeframe. The H&S pattern, established on April 12, triggered a sharp decline after breaching the neckline around 1.2500.
The 14-period Relative Strength Index (RSI) fluctuates within the 40.00-60.00 range, indicating indecisiveness among market participants.
