The Pound Sterling (GBP) has experienced a slight decline during Wednesday’s London session but continues to hold on to recent gains against the US Dollar (USD), trading close to the significant level of 1.3400. The GBP/USD pair remains resilient as the US Dollar weakens, nearing its yearly low due to expectations of further interest rate cuts from the Federal Reserve (Fed) in upcoming policy meetings.
The US Dollar Index (DXY), which measures the dollar’s value against six major currencies, is currently positioned around 100.20.
Last week, the Fed initiated its policy-easing cycle with a 50-basis point (bps) reduction in interest rates, bringing the target range to 4.75%-5.00%. This move aims to bolster labor market conditions, with the Fed expressing confidence that inflation will sustainably return to its 2% target. Among the Federal Open Market Committee (FOMC) members, only Fed Governor Michelle Bowman advocated for a more gradual approach, suggesting a standard 25 bps cut.
According to the CME FedWatch tool, further rate cuts are anticipated, with projections indicating a total reduction of 75 bps by year-end, which includes one 50 bps and one 25 bps cut. Recent data from 30-day Federal fund futures indicates a rise in the probability of a 50 bps cut in November, increasing from 37% to 59% over the past week.
Looking ahead, investors are closely monitoring the upcoming US core Personal Consumption Expenditures (PCE) Price Index data for August, the Fed’s preferred measure of inflation, set to be released on Friday. Economists forecast an increase in the core annual inflation rate to 2.7%, up from 2.6% in July.
Market Overview:
The Pound Sterling shows mixed performance against major peers, yet its outlook remains generally strong as investors expect a gradual rate-cutting cycle from the Bank of England (BoE). In an interview with the Kent Messenger, BoE Governor Andrew Bailey affirmed, “I do think the path for interest rates will be downwards, gradually.” He emphasized his confidence in inflation returning to the bank’s target of 2% but refrained from specifying a neutral rate, stating that he does not foresee a return to the historic lows experienced during the pandemic.
In the UK, annual headline inflation has stabilized near the BoE’s target of 2% over the past three months. However, persistent high inflation in the services sector remains a concern, prompting close monitoring of the Services Consumer Price Index (CPI), which rose to 5.6% in August from 5.2% in July.
Technical Analysis:
The Pound Sterling’s strength near 1.3400 against the US Dollar is evident in European trading hours, with the near-term outlook for the GBP/USD pair remaining positive. All short-to-long-term Exponential Moving Averages (EMAs) are trending upward.
Earlier in September, the GBP/USD pair gained momentum following a recovery from a corrective dip toward a trendline drawn from the December 28, 2023, high of 1.2828, leading to a significant breakout on August 21. The 14-day Relative Strength Index (RSI) has surpassed the 60.00 mark, indicating strong bullish momentum.
Resistance for the pair is anticipated around the psychological level of 1.3500, while crucial support is identified at 1.3000.
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