The Pound Sterling (GBP) experienced a modest resurgence during Thursday’s London session, finding some respite after enduring a pronounced sell-off that drove the Cable to a two-month low near 1.2520. However, the near-term allure of the GBP/USD pair has been diminished as the US Dollar strengthens, buoyed by a reassessment among traders regarding the likelihood of rate cuts by the Federal Reserve (Fed) in upcoming policy meetings slated for June and July.
Heightened expectations of persistently elevated United States Consumer Price Index (CPI) and Nonfarm Payrolls (NFP) data for March have tempered prospects for imminent rate cuts by the Fed, as such actions could exacerbate inflationary pressures. Additionally, concerns regarding inflationary trends have been underscored by the recent release of Federal Open Market Committee (FOMC) Minutes from the March meeting, revealing policymakers’ apprehension regarding inflationary indicators in the initial months of the year.
The US Dollar Index (DXY), a measure of the USD’s performance against a basket of major currencies, has surged to a fresh more than four-month high near 105.30, further accentuating the challenges faced by the Pound Sterling.
Meanwhile, diminished expectations of Fed rate cuts in the coming months have deepened apprehensions of a prolonged policy divergence between the Fed and the Bank of England (BoE). Anticipation mounts for the BoE to commence interest rate reductions as early as June, given the deceleration of inflation in the United Kingdom over the past two months, coupled with projections of sluggish economic growth and easing labor market conditions. Such circumstances cast a shadow over the prospects of the Pound Sterling.
Market sentiment remains subdued, with the Pound Sterling trading above the psychological support level of 1.2500 against the US Dollar. As investors recalibrate their expectations regarding Fed rate cuts, risk-off sentiment prevails, with S&P 500 futures extending losses in the wake of Wednesday’s nearly 1% decline.
In the United Kingdom, focus shifts to the release of crucial economic indicators, including monthly Gross Domestic Product (GDP) and factory data for February. Forecasts suggest a potential slowdown in economic growth, with expectations for monthly GDP expansion to taper to 0.1% from January’s 0.2% increase. Industrial and manufacturing production data will also be scrutinized for insights into overall demand dynamics, particularly in the context of the UK’s recovery from a technical recession.
From a technical standpoint, the Pound Sterling’s downtrend persists, with the GBP/USD pair approaching the critical psychological support level of 1.2500 amidst prevailing risk aversion. A breach below this level could precipitate a pronounced downside move, exacerbated by the pair’s proximity to the 200-day Exponential Moving Average (EMA) at 1.2570, a historically significant support level.
The Relative Strength Index (RSI), a key momentum indicator, hovers around the 40.00 mark, with a potential drop below this threshold signaling a further downturn in bearish momentum for the GBP/USD pair.
