Pound Sterling soars amid upbeat market mood, BoE decision in focus

• The Pound Sterling rallies to 1.2800 ahead of BoE’s policy decision.
• February’s soft UK inflation report could allow the BoE to deliver a slightly dovish guidance.
• The US Dollar weakens as the Fed keeps forecasting three rate cuts this year.

The Pound Sterling (GBP) exhibits strength in Thursday’s London session ahead of the Bank of England’s interest rate decision, prompted by investors’ higher risk appetite. The GBP/USD pair saw a juggernaut rally as the Federal Reserve (Fed) stuck to the forecast of three rate cuts for this year, which weakened investors’ appeal for the US Dollar (USD). 

The BoE is widely anticipated to keep interest rates unchanged at 5.25% as the United Kingdom’s core Consumer Price Index (CPI), which is the preferred inflation measure of policymakers, is growing by more than twice the required rate of 2%. Investors will look for cues about when the BoE will start lowering key borrowing rates. Currently, expectations are firm for a rate cut in the August policy meeting.

BoE’s guidance on interest rates could be slightly dovish as price pressures grew at a slower pace than market expectations in February. Annual headline and core inflation softened to 3.4% and 4.5%, respectively. The UK Office for National Statistics (ONS) reported that “Food and prices at eateries were the biggest downward drags, offset by motor fuels.” 

It will be interesting to watch whether recent soft inflation figures have changed the views of Monetary Policy Committee (MPC) members Catherine Mann and Jonathan Haskel. Both of them have been voting for a further interest-rate hike in recent meetings even as the majority of the MPC decided to keep rates on hold at 5.25% in the past four policy meetings. 

Daily digest market movers: Pound Sterling extends upside as US Dollar weakens

• The Pound Sterling advances to the round-level resistance of 1.2800 amid a cheerful market mood. The appeal for risk-sensitive assets strengthened after the Federal Reserve maintained its projections of three rate cuts for this year in its monetary policy meeting on Wednesday. Fed policymakers didn’t dial down their rate-cut projections despite inflation remaining hotter than expected in February.
• The Fed continued with its argument that rate cuts are appropriate only if it gains greater confidence that inflation will sustainably decline to the 2% target. However, it mentioned that the underlying story of price pressures moving in the right direction has not changed despite the recent acceleration in inflation.
• Going forward, the Pound Sterling is expected to face intense volatility as the Bank of England will announce the interest rate decision at 12:00 GMT. The BoE is expected to keep its interest rates unchanged at 5.25% for the fifth time in a row. Investors will closely pay attention to vote pattern from policymakers, particularly from Catherine Mann and Jonathan Haskel, who have been favoring more interest rate hikes.
• The BoE is expected to maintain the argument that rate cuts should be considered only after gaining confidence that inflation will sustainably return to 2%. However, February’s inflation readings, released on Wednesday, could have strengthened their confidence that inflation is moving in the right direction. This could allow them to discuss when to begin reducing interest rates.
• UK stubborn inflation has been driven by high service inflation, which is fed by strong wage growth. Investors will keenly focus on the wage growth outlook as earnings are increasing at a higher pace than what is required to bring down inflation sustainably to 2%.

Technical Analysis: Pound Sterling climbs to 1.2800

The Pound Sterling soars to the round-level resistance of 1.2800 amid risk-on sentiment. The GBP/USD pair delivered a strong recovery after discovering buying interest near the breakout region of the Descending Triangle formed around 1.2700. The near-term demand for the GBP/USD pair turns bullish as it rebounds above the 20-day Exponential Moving Average (EMA), which trades around 1.2740. 

On the downside, the downward-sloping border of the Descending Triangle chart pattern will support the pair. 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) climbs above 60.00. If the RSI (14) manages to sustain above that level, bullish momentum will trigger.