In Monday’s London trading session, the Pound Sterling (GBP) is trading close to an almost two-and-a-half-year high near 1.3200 against the US Dollar (USD). The GBP/USD pair is poised to extend its seven-day winning streak as the US Dollar weakens following Federal Reserve (Fed) Chair Jerome Powell’s recent announcement that the central bank will begin cutting interest rates in September.
The US Dollar Index (DXY), which measures the Greenback’s strength against six major currencies, is hovering near a new year-to-date (YTD) low of 100.53.
In a speech delivered at the Jackson Hole Symposium on Friday, Fed Chair Powell indicated that “the time has come for policy to adjust.” However, he did not commit to a specific path for interest-rate cuts, opting instead to remain data-dependent. Powell stated that “the direction of travel is clear,” but the timing and pace of rate cuts will be influenced by incoming data, the evolving outlook, and the balance of risks.
Powell’s remarks suggest that the central bank is increasingly concerned about deteriorating labor market conditions while remaining confident that inflation pressures will eventually meet the 2% target. He noted that risks to inflation have lessened, while risks to the labor market have increased. “We will do everything we can to support a strong labor market as we make further progress toward price stability,” Powell added.
This week, a key focus for the US Dollar will be the core Personal Consumption Expenditure (PCE) Price Index data for July, scheduled for release on Friday. PCE inflation is projected to have risen by 0.2% month-over-month.
On Monday, attention will also be on the US Durable Goods Orders data for July, set to be released at 12:30 GMT. New Orders for Durable Goods, a critical indicator of core consumer inflation, is anticipated to have grown by 4% following a significant decline in June. The Pound Sterling will not feature prominently in today’s data as the UK is observing a bank holiday.
Pound Sterling Strengthens Amid BoE Policy Outlook
The Pound Sterling shows strong performance against most major currencies, except those in the Asia-Pacific region, at the start of the week. The British currency benefits from optimism surrounding the Bank of England’s (BoE) cautious approach to policy easing amid ongoing inflation concerns in the UK.
BoE Governor Andrew Bailey, in his Jackson Hole Symposium speech, suggested that the second-round effects of inflation might be less severe than anticipated. However, he emphasized that the BoE should not rush into further rate cuts, according to Reuters. Bailey stressed the importance of not reducing interest rates too quickly or excessively and dismissed recession risks, noting that steady disinflation aligns with the aim of achieving a soft economic landing.
This week, the Pound Sterling will be influenced by market speculation regarding BoE interest rate cuts, as there is a lack of major economic data from the UK. Currently, market participants expect one more rate cut from the BoE this year. The BoE’s recent decision to cut rates on August 1, following a close 5-4 vote among Monetary Policy Committee members, contrasts with the latest positive economic data, including a stronger-than-expected flash S&P Global/CIPS PMI for August, which has tempered expectations for another rate cut in September.
Technical Analysis: GBP/USD Tests New Highs
The Pound Sterling has softened slightly against the US Dollar but remains near the 1.3200 level after breaking out of a Rising Channel chart formation on the weekly time frame. The GBP/USD pair has reached a new near two-and-a-half-year high and is expected to target the February 4, 2022 high of 1.3640.
The 20-week Exponential Moving Average (EMA) at approximately 1.2766 indicates a strong upward trend. The 14-period Relative Strength Index (RSI) is in the bullish range of 60.00-80.00, indicating strong momentum but also reaching overbought levels around 70.00, suggesting a potential for a corrective pullback. On the downside, the psychological level of 1.3000 will be a key support for Pound Sterling bulls.
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