Pound Sterling weakens on UK’s soft inflation, risk-off sentiment

• The Pound Sterling is expected to remain under pressure on lower-than-anticipated UK CPI data for February.
• Soft UK inflation reinforces market expectations for the BoE to begin reducing interest rates in August.
• The next move in the US Dollar will be guided by the Fed’s monetary policy meeting.

The Pound Sterling (GBP) turns volatile in Wednesday’s London session as the United Kingdom Office for National Statistics (ONS) reported softer-than-expected Consumer Price Index (CPI) data for February. Annual headline and core inflation decelerated to 3.4% and 4.5%, respectively. Lower inflation is expected to allow Bank of England (BoE) policymakers to consider cutting interest rates early than what market participants had anticipated.

Investors should brace for high volatility for the Pound Sterling as the BoE is set to announce its second monetary policy decision of 2024 on Thursday. Investors are expecting the BoE to hold interest rates steady at 5.25%, but soft inflation data might allow policymakers to deliver a slight dovish guidance on interest rates. 

Meanwhile, investors remain risk-averse ahead of the Federal Reserve’s (Fed) policy meeting, which will be announced at 18:00 GMT. Investors will keenly focus on the quarterly updated dot plot and economic projections as the Fed is expected to keep interest rates unchanged in the range of 5.25%-5.50%. The dot plot shows interest rate projections from Fed officials for various time frames.

Daily digest market movers: Pound Sterling eyes downside amid multiple headwinds

The Pound Sterling is expected to face pressure as the United Kingdom ONS has reported softer-than-expected consumer price inflation data for February. The annual headline inflation significantly decelerated to 3.4% from expectations of 3.6% and the prior reading of 4.0%. The monthly headline CPI grew by 0.6%, rebounding from a similar decline seen in January. Investors anticipated the monthly headline inflation to grow at a higher pace of 0.7%.

The annual core CPI, which strips off volatile food and energy prices, softened to 4.5% from estimates of 4.6% and the former reading of 5.1%. BoE policymakers generally consider the core inflation data as a preferred measure for decision-making on interest rates. Soft figures might increase their confidence that inflation will sustainably return to the desired rate of 2%. BoE policymakers have been reiterating that rate cuts would be appropriate only if they get the conviction that the inflation target will be achieved.

The Pound Sterling is expected to remain volatile as investors will shift focus to the Bank of England’s interest rate decision, which will be announced on Thursday. The BoE is expected to keep interest rates unchanged at 5.25% for the fifth time in a row. Investors will look for cues about when the BoE will start reducing interest rates. Currently, investors hope that the BoE will start reducing interest rates from the August meeting. The soft inflation data released on Wednesday is likely to reinforce these expectations.

Meanwhile, the market sentiment remains cautious ahead of the Federal Reserve’s monetary policy decision. The CME FedWatch tool shows that the central bank is set to keep interest rates unchanged in the range of 5.25%-5.50%. With the no-change in interest rates almost fully priced in,  the monetary policy statement, Fed Chair Jerome Powell’s press conference, and the dot plot and economic projections will be in focus. 

Technical Analysis: Pound Sterling struggles to hold above 20-EMA

The Pound Sterling finds interim support near the breakout region of the Descending Triangle formed around 1.2700. The near-term demand for the GBP/USD pair remains uncertain as it struggles to sustain above the 20-day Exponential Moving Average (EMA), which trades around 1.2730. 

On the downside, the downward-sloping border of the Descending Triangle chart pattern will act as a support of the Pound Sterling. On the upside, a seven-month high at around 1.2900 will be a major barricade for the Cable.

The 14-period Relative Strength Index (RSI) returns to the 40.00-60.00 range, indicating a sharp volatility contraction.