The Pound Sterling (GBP) is currently navigating a directionless path as investors shift their focus towards impending central bank policy decisions scheduled for the upcoming week. The GBP/USD remains in a sideways movement, with market attention fixed on the Bank of England‘s (BoE) anticipated steady interest rate decision. Investors are particularly interested in the BoE’s stance on interest rates, given the support from robust December PMI data, which has strengthened the case for maintaining rates at restrictive levels.
Market participants are advised to brace for potential high volatility, as the market sentiment hinges on the release of United States Q4 Gross Domestic Product (GDP) data. An optimistic outlook for the US data could diminish expectations of an early interest rate cut by the Federal Reserve (Fed) and provide support for the US Dollar.
In the latest market movements, Pound Sterling has slipped to near 1.2700 against the US Dollar, reflecting a cautious mood as investors await the United States Q4 GDP and core underlying inflation data for January. The GBP/USD pair experienced a notable uptick on Wednesday following robust preliminary UK PMI data for January.
According to S&P Global, the Manufacturing PMI for January surpassed expectations at 47.3 (preliminary reading), compared to the anticipated 46.7 and the previous reading of 46.2. Additionally, Services PMI expanded to 53.8, surpassing the prior reading of 53.4, while investors had projected a slight decline to 53.2. A PMI figure below 50 signifies contraction, while above 50 indicates expansion.
Manufacturing activities were reported to be supported by increased hopes that price pressures would ease, along with lower borrowing costs and a faster economic recovery. The improved Manufacturing PMI numbers have reinforced the need for the BoE to maintain higher interest rates for an extended period, potentially supporting the strength of the Sterling.
Looking ahead, market attention will shift to the Bank of England’s interest rate decision, expected next week. The consensus anticipates the BoE will maintain interest rates steady at 5.25% for the fourth consecutive time, with a keen focus on fresh guidance regarding the interest rate outlook.
Meanwhile, the US Dollar Index (DXY) has seen a sharp recovery, nearing 103.30, as the demand for safe-haven assets increases ahead of crucial economic data. Market expectations suggest a slower growth rate of 2.0% for the US economy in the fourth quarter, potentially influencing the possibility of a rate cut by the Federal Reserve in March. Stronger-than-expected numbers, however, could support the narrative of higher-for-longer interest rates.
In terms of technical analysis, Pound Sterling is currently oscillating within Wednesday’s trading range, with the broader trend for the GBP/USD pair remaining positive as it sustains above the 20- and 50-day Exponential Moving Averages (EMAs). The 14-period Relative Strength Index (RSI) indicates a decline in volatility within the 40.00-60.00 range. A potential downside move is highlighted if the GBP/USD drops below the critical support level of 1.2650.
