The Pound Sterling (GBP) retreated from a more-than-two-year peak of 1.3266 against the US Dollar (USD) during Wednesday’s London session. The GBP/USD pair fell as the US Dollar made a recovery, with market attention turning to the forthcoming core Personal Consumption Expenditure (PCE) Price Index data for July, set for release on Friday. This report could serve as a significant catalyst for the currency pair.
The US Dollar Index (DXY), which measures the Greenback’s strength against six major currencies, saw renewed buying interest following a fresh year-to-date low of 100.50.
Despite this rebound, the near-term outlook for the US Dollar remains cautious. Investors anticipate a reduction in interest rates by the Federal Reserve (Fed) at its September meeting. Debate now centers on whether the Fed will implement a substantial rate cut or opt for a smaller reduction in borrowing costs.
The CME FedWatch tool indicates a 34.5% probability of a 50-basis point (bps) rate cut in September, with the majority of expectations leaning towards a 25 bps reduction.
For core PCE inflation, economists forecast a year-on-year increase to 2.7% from 2.6% in June, with a steady 0.2% monthly rise. Persistent inflation could dampen speculation of a significant rate cut, while further decreases in price pressures may bolster such expectations.
Market Digest: Pound Sterling’s Mixed Performance and Upcoming BoE Insights
In Wednesday’s European trading, the Pound Sterling exhibited a mixed performance against major currencies. The British currency is anticipated to trade broadly sideways as investors await new insights into the Bank of England’s (BoE) interest rate policy.
In August, the BoE reduced interest rates by 25 basis points to 5%, ending a two-and-a-half-year period of restrictive monetary policy. This decision reflected confidence in a return to the BoE’s 2% inflation target. Market participants expect the BoE’s future rate cuts to be more gradual compared to other central banks, given the UK economy’s relative resilience, as indicated by the flash S&P Global/CIPS PMI for August and robust Q2 Gross Domestic Product (GDP) growth.
Investors are particularly keen to hear from BoE policymaker Catherine Mann, who will speak at 12:15 GMT. Mann, who voted to keep rates steady at 5.25% during the August 1 policy meeting, is expected to provide guidance on the BoE’s rate-cutting trajectory for the remainder of the year, as well as insights into service inflation and wage pressures.
On the political front, UK Prime Minister Keir Starmer’s comments on the upcoming financial budget, set for announcement in October, have positively impacted the Pound Sterling. Starmer indicated that the fiscal budget will involve short-term sacrifices for long-term benefits, including a tax increase targeting higher-income households.
Technical Analysis: Key Support Level for Pound Sterling
The Pound Sterling has corrected slightly after reaching a two-and-a-half-year high of 1.3266 against the US Dollar. The near-term outlook for the GBP/USD pair remains positive as it maintains its breakout from the Rising Channel chart formation on the weekly timeframe. Should bullish momentum persist, the pair may extend its gains towards the February 4, 2022, high of 1.3640.
The upward-sloping 20-week Exponential Moving Average (EMA) near 1.3000 supports a strong upside trend. The 14-period Relative Strength Index (RSI) is currently in the bullish range of 60.00-80.00, suggesting strong momentum, though it is approaching overbought levels around 70.00, which may increase the likelihood of a corrective pullback. On the downside, the psychological level of 1.3000 remains a crucial support level for GBP bulls.
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