On Thursday, the Pound Sterling (GBP) maintained its recovery from late Wednesday, holding steady near 1.3050 against the US Dollar (USD) after bouncing from the key psychological support level of 1.3000. However, the outlook for the GBP/USD pair remains cautious as the US Dollar clings to gains near a new weekly high, bolstered by expectations of a Federal Reserve (Fed) interest rate cut.
The US Dollar Index (DXY), which measures the Greenback’s strength against six major currencies, remains elevated around 101.70. Market speculation about the size of the upcoming Fed rate cut has intensified following August’s Consumer Price Index (CPI) data, which revealed persistent inflationary pressures despite a lower-than-expected annual headline inflation rate. Core inflation, excluding volatile food and energy prices, remained sticky, rising by 3.2% year-on-year and increasing by 0.3% month-on-month, surpassing the anticipated 0.2%.
This sticky core inflation data has dampened expectations for a more substantial Fed rate cut. According to the CME FedWatch Tool, the likelihood of a 50 basis points (bps) reduction in September has dropped to 13% from 40% a week earlier, with markets now largely anticipating a 25 bps cut.
Investors are also awaiting key US economic data, including the Producer Price Index (PPI) for August and Initial Jobless Claims for the week ending September 6, both set to be released at 12:30 GMT. The PPI is expected to show further slowing in headline producer inflation due to declining energy prices, while core PPI figures are projected to accelerate.
In European trading on Thursday, the GBP showed slight gains against major peers, with the exception of Asia-Pacific currencies. Market participants are optimistic that the Bank of England (BoE) will adopt a less aggressive policy-easing stance compared to other central banks. According to a Reuters poll, the BoE is expected to maintain its interest rates at 5% in the upcoming meeting but may consider reductions in November, despite inflation remaining above the 2% target. BoE Governor Andrew Bailey’s comments at the Jackson Hole Symposium indicated a gradual approach to rate cuts to manage inflationary pressures.
Recent robust job growth and a decrease in the Unemployment Rate, which fell to 4.1% with 265K new jobs added in the three months ending in July, have strengthened expectations that the BoE will keep rates steady this month. Upcoming triggers for the Pound Sterling will include the UK Consumer Price Index (CPI) data for August and the BoE’s interest rate decision next week.
Technical Analysis:
The GBP/USD has edged higher to around 1.3050, recovering from 1.3000. Despite this recovery, the short-term outlook for the pair appears weak, with price action falling below the trendline established from the December 28, 2023 high of 1.2828. Additionally, a decline below the 20-day Exponential Moving Average (EMA) near 1.3070 has diminished the Pound Sterling’s appeal.
The 14-day Relative Strength Index (RSI) has moved into the 40.00-60.00 range, suggesting that bullish momentum may have waned for now. However, the long-term bullish trend remains intact.
Resistance for the GBP/USD is anticipated near the round-level at 1.3200 and the psychological level of 1.3500. On the downside, the psychological support level at 1.3000 remains critical for maintaining bullish sentiment.
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