The Pound Sterling (GBP) is experiencing selling pressure near the crucial resistance level of 1.3400 against the US Dollar (USD) during Friday’s London session. The recent rally in the GBP/USD pair appears to have stalled as market participants turn their attention to the upcoming US Personal Consumption Expenditure (PCE) Price Index data for August, set to be released at 12:30 GMT.
Analysts estimate that the core PCE index, the Federal Reserve’s (Fed) preferred measure of inflation, has risen by 2.7% year-on-year, a slight increase from the 2.6% growth observed in July. Month-over-month, prices are expected to have risen steadily by 0.2%.
This data is anticipated to significantly influence market speculation regarding potential interest rate cuts by the Fed in November. Current market sentiment is nearly evenly split between expectations for a 50 basis points cut and a smaller 25 basis points reduction.
According to the CME FedWatch tool, the likelihood of a 50 basis point rate cut in November has decreased to 51%, down from 57% on Thursday. If the PCE data indicates a slowdown in inflation, market expectations for a substantial rate cut may rise. Conversely, stronger inflation figures could diminish these prospects.
The importance of US inflation data has waned recently, as Fed officials express confidence that price pressures will align with the bank’s 2% target. Additionally, policymakers are increasingly cautious regarding labor market risks. Last week, the Fed initiated a policy-easing cycle with an atypical 50 basis point cut, lowering rates to a range of 4.75%-5.00%, indicating a commitment to bolster labor market strength.
Market Overview: GBP Weakens Ahead of PCE Data
On Friday, the Pound Sterling performed weakly against most major currencies, apart from those in the Asia-Pacific region, as investors adopt a cautious stance ahead of the PCE inflation data release. With no significant UK economic data scheduled for the upcoming weeks, the GBP will largely be influenced by market expectations surrounding the Bank of England‘s (BoE) monetary policy for the remainder of the year.
Market participants anticipate that the BoE may lower interest rates in one of the two remaining policy meetings for 2024. The BoE shifted towards policy normalization with a 25 basis point cut in August, bringing rates to 5%, but opted to keep rates unchanged in last week’s meeting.
BoE Governor Andrew Bailey indicated in a recent interview with the Kent Messenger newspaper that “the path for interest rates will be downwards, gradually,” reinforcing confidence in a sustainable return of inflation to the bank’s 2% target. However, he did not specify a neutral rate, assuring that rates will not return to historic lows experienced during the pandemic.
Technical Analysis: GBP/USD Struggles to Overcome 1.3400 Resistance
The Pound Sterling is struggling to maintain upward momentum above the key resistance level of 1.3400 against the US Dollar in European trading hours. Following a peak above 1.3430, the GBP/USD pair has encountered selling pressure. However, the near-term outlook remains positive, supported by the 20-day Exponential Moving Average (EMA) near 1.3235, which is trending upwards.
Earlier this month, the GBP/USD strengthened after bouncing back from a corrective move near the trendline established from the December 28, 2023, high of 1.2828, following a breakout on August 21.
The 14-day Relative Strength Index (RSI) is currently trending downward but remains above the 60.00 threshold, indicating persistent bullish momentum. Looking ahead, the GBP/USD pair will face resistance at the psychological level of 1.3500, while key support for bullish traders is positioned around the 20-day EMA at 1.3235.
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