Pound Sterling clings to gains amid improved market sentiment

• Pound Sterling trades in a range during a holiday-truncated week.
• The Fed is expected to cut rates sooner than the BoE.
• A recession in the UK economy is highly likely.

The Pound Sterling (GBP) demonstrates volatility contraction in a thin-trading week. The GBP/USD pair remains broadly upbeat as investors hope that the Bank of England (BoE) will start its rate-cut campaign later than the Federal Reserve (Fed) as inflationary pressures in the United States are in a clear downtrend.

Investors continue to channel liquidity into the Pound Sterling despite deepening fears of a recession in the United Kingdom economy. As per the latest estimates, the British economy contracted by 0.1% in the July-September period. According to the latest projections from the BoE, the economy is expected to remain stagnant in the last quarter this year. The UK economy would be in a technical recession if it contracts again.

Daily Digest Market Movers: Pound Sterling remains upbeat amid risk-on mood

• Pound Sterling manages to hold strength against the US Dollar as easing price pressures in the United States economy have fuelled bets for early rate cuts by the Federal Reserve in 2024.
• The Pound Sterling clings to gains, benefitting from the upbeat Retail Sales data for November due to robust sales at non-food retail stores.
• Higher discounts by non-food retail stores amid Black Friday sales led to a robust increment in consumer spending.
• Monthly Retail Sales recorded a higher 1.3% against the consensus of 0.4% and a stagnant performance in October. Surprisingly, annual sales at retail stores were up by 0.1% while investors forecasted a contraction by 1.3%.
• The Pound Sterling continues to hold gains tightly despite deepening fears of a recession in the United Kingdom.
• The UK Office for National Statistics (ONS), in its revised estimates, revealed a contraction in the economy of 0.1% in the third quarter of 2023. Earlier, it anticipated a stagnant performance in the same period.
• Meanwhile, the Bank of England, in its latest projections, indicated that the economy would remain stagnant in the final quarter of this year. 
• Last week, the UK’s Finance Minister, the Chancellor of the Exchequer Jeremy Hunt said there is a reasonable chance that the central bank may decide to reduce interest rates if we stay on course and manage to bring down inflation.
• On the contrary, BoE policymakers have been stating interest rate cuts would be “premature” in spite of a significant fall in the price index. Stronger wage growth is dampening confidence that inflation is clearly in a downtrend.
• Last week, Barclays said that the BoE may initiate its rate cut campaign from May, when it was previously expected from August.
• Major factors that are fueling early rate-cut hopes are expectations of a recession in the UK economy and the rare step of the  Chancellor Jeremy Hunt suggesting the central bank make rate cuts to boost growth.
• Going forward, the market mood is expected to remain quite amid a holiday-truncated week.
• The US Dollar Index (DXY) trades near five-month low around 101.46 as a more-than-anticipated decline in the core Personal Consumption Expenditure price index (PCE) for November has pumped bets in favour of early rate cuts by the Fed.
• Monthly US core PCE data grew slightly by 0.1% while investors projected a growth rate of 0.2% as recorded for October. On an annualized basis, the underlying inflation has decelerated to 3.2% vs. the consensus of 3.3% and the former reading of 3.5%.
• Investors should note that the Federal Reserve (Fed), in its Summary of Projections (SOP) released last week, forecasted core PCE at 3.2% by the year-end.

Technical Analysis: Pound Sterling marches toward 1.2800

Pound Sterling approaches the immediate resistance of 1.2800, being supported by a risk-on mood. The GBP/USD pair demonstrates a Symmetrical Triangle chart pattern formation on an intraday time frame amid the festive season. The formation of the aforementioned chart pattern indicates a sheer contraction in volatility.

On a daily time frame, the Cable is being consistently supported by upward-sloping 20-day Exponential Moving Average (EMA), which trades around 1.2630.

The Relative Strength index (RSI) (14) is on the verge of breaking above 60.00. A bullish momentum would trigger if the RSI manages to do so.