Pound Sterling slumps on dismal market sentiment

• Pound Sterling faces a sell-off as market sentiment turns volatile.
• BoE Ramsden wants to see how long price pressures will remain sticky.
• The US Dollar rises ahead of US core PCE price index data.

The Pound Sterling (GBP) dips in Wednesday’s European session as the market sentiment remains volatile ahead of critical United States core Personal Consumption Expenditure price index (PCE) data for January. The GBP/USD pair falls on the back foot despite expectations that the Bank of England (BoE) will begin reducing interest rates later than the Federal Reserve (Fed). This supports the Pound Sterling as higher interest rates generally attract greater foreign capital inflows.

Investors see the BoE considering a change in monetary policy stance later than other central banks as price pressures in the United Kingdom economy are stubborn due to high wage growth – a plus for Sterling. BoE policymakers have warned that the pace at which Average Earnings are decelerating is half of what is required to achieve price stability.

Going ahead, the Pound Sterling will be guided by market expectations for rate cuts by the BoE. Stock investors hope that the BoE will start reducing interest rates from August as this will support the wider stock market. This might be the time when inflation flares up again after declining to 2%, as projected by the BoE, revealed in the latest monetary policy statement.

Daily Digest Market Movers: Pound Sterling weakens on subdued market sentiment

• Pound Sterling falls sharply after failing to recapture the round-level resistance of 1.2700 amid a cautious market mood.
• Investors are holding to the sidelines ahead of the crucial United States core PCE price index data for January, which will be published on Thursday.
• This crucial inflation data will provide more cues on when the Federal Reserve (Fed) could begin reducing interest rates.
• Projections from market participants show that the underlying inflation data decelerated to 2.8% from 2.9% in December on a year-on-year basis.
• The US Dollar Index (DXY), which values the Greenback against six major currencies, rises to the crucial resistance of 104.00.
• On the domestic front, the Pound Sterling will be guided by market expectations for rate cuts by the Bank of England.
• BoE policymakers are less interested in lowering key lending rates currently as they need more evidence that inflation will come down to the 2% target.
• On Tuesday, BoE Deputy Governor Dave Ramsden, who voted for holding interest rates at 5.25% in the last monetary policy meeting, said he wants to see how long inflation will remain persistent.
• Dave Ramsden added the duration of inflation remaining persistent will determine how long interest rates will be maintained at 5.25%.
• Price pressures in the United Kingdom economy are stubborn due to higher wage growth and service inflation.
• These key inflation indicators have come down sharply, but the pace of decline is still inconsistent, with inflation declining towards the 2% target.

Technical Analysis: Pound Sterling falls from 1.2700

Pound Sterling drops sharply after facing stiff resistance near 1.2700. The GBP/USD pair is consistently facing barricades near the downward-sloping border of the Descending Triangle pattern formed on a daily time frame, with the upper border line traced from the December 28 high at 1.2827. The triangle’s horizontal support is plotted from December 13 low near 1.2500.

A Descending Triangle pattern demonstrates indecisiveness among market participants but with a slight downside bias due to lower highs and flat lows formation.

The pair declines toward the 20 and 50-day Exponential Moving Averages (EMAs), which trade around 1.2630. Meanwhile, the 14-period Relative Strength Index (RSI) remains inside the 40.00-60.00 region, which indicates a sharp contraction in volatility.