In the Tuesday London session, the Pound Sterling (GBP) saw a correction from the resistance level of 1.2800 against the US Dollar (USD), though maintaining its overall strength. Earlier in the day, the GBP/USD pair marked a fresh two-month high, primarily driven by a notable decline in the value of the US Dollar, triggered by growing speculations surrounding potential interest rate cuts by the Federal Reserve (Fed) starting from the September meeting.
The momentum for the Fed’s return to policy normalization gained traction following the release of the United States (US) ISM Manufacturing Purchasing Managers’ Index (PMI) report for May, indicating a potential loss of momentum in the growth outlook of the world’s largest economy. The PMI report revealed a contraction in US manufacturing activity for the second consecutive month, citing elusive demand and reluctance to invest among companies due to prevailing monetary policy and other economic conditions.
The Manufacturing PMI, a key indicator of factory activity, fell to 48.7, below both the consensus of 49.6 and the previous reading of 49.2. Furthermore, the report highlighted a subdued demand environment and easing inflationary pressures. Notably, the New Orders Index, reflecting the demand outlook, dropped to 45.4 from the previous reading of 49.1, while the Prices Paid Index, indicating changes in input prices, decreased to 57.0 from the consensus of 60.0 and the previous reading of 60.9. The deceleration in input price growth suggests a slower rise in selling prices, alleviating concerns about persistent inflation.
Market sentiment for the Pound Sterling softened against the backdrop of a steadying US Dollar in the European session, following Monday’s sell-off. The US Dollar Index (DXY), tracking the Greenback’s value against major currencies, remained marginally higher but hovered close to a nearly two-month low near 104.00. Despite this, the short-term outlook for the GBP/USD pair remained bullish, with traders increasingly pricing in the possibility of Fed interest rate cuts in September.
According to the CME FedWatch tool, traders now assign a 60% probability to interest rates decreasing from their current levels in September, a significant increase from the 45.8% recorded a week ago. Expectations for Fed rate cuts are anticipated to fluctuate throughout the week as investors await major economic data releases, including the ISM Services PMI and Nonfarm Payrolls (NFP) data for May, scheduled for Wednesday and Friday, respectively.
In today’s trading session, investor attention will be on the JOLTS Job Openings data for April, expected to show a decrease to 8.34 million job postings from the prior reading of 8.49 million. Lower job postings may signal weakening in the labor market.
Meanwhile, in the United Kingdom (UK), speculation regarding Bank of England (BoE) rate cuts is unlikely to significantly impact the Pound Sterling, given the absence of major economic events and the lack of statements from BoE officials until after the upcoming elections. Financial markets currently anticipate the BoE to initiate interest rate reductions in the August meeting. While the UK’s annual headline Consumer Price Index (CPI) has notably declined to 2.3%, concerns persist over persistent service inflation, a key consideration for BoE policymakers.
Technical Analysis: GBP Aims for Stability Above Key Fibonacci Retracement
The Pound Sterling experienced a decline from the round-level resistance of 1.2800 against the US Dollar. However, the GBP/USD pair’s appeal remains intact, particularly as it sustains above the crucial 78.6% Fibonacci retracement support level at 1.2770 (calculated from the March 8 high of 1.2900 to the April 22 low at 1.2300).
Forecasts suggest that the Cable will likely maintain its bullish trajectory, given that short-to-long-term Exponential Moving Averages (EMAs) are trending higher, indicating a robust uptrend. Additionally, the 14-period Relative Strength Index (RSI) has entered the 40.00-60.00 range, suggesting a momentum shift towards the upside.
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