Pound Sterling declines ahead of Fed, BoE decisions outcome

• The Pound Sterling declines to near 1.2825 against the US Dollar ahead of the Fed, BoE policy decisions outcome.
• Firm speculation for BoE rate cuts on Wednesday has weighed heavily on the Pound Sterling.
• The US Dollar slumps as the Fed is expected to deliver a dovish guidance on interest rates.

The Pound Sterling (GBP) weakens in Wednesday’s London session amid caution ahead of the Bank of England’s (BoE) interest rate decision, which will be announced on Thursday. The British currency declines against its major peers, except the Australian Dollar (AUD), as investors see the BoE reducing interest rates in the August meeting for the first time since March 2020. The BoE has been maintaining a restrictive monetary policy stance since December 2021 in an attempt to bring inflation down, which was driven by pandemic-led stimulus.

Market experts see the BoE cutting rates by 25 basis points (bps) a tough call as policymakers have hesitated to endorse rate cuts due to high inflation in the service sector. United Kingdom’s (UK) annual service inflation grew steadily by 5.7% in June, higher than the bank’s forecast of 5.1% and roughly double the level needed to boost confidence for rate cuts.

While expectations of BoE rate cuts have risen significantly, the central bank is less likely to commit to a specific policy expansion path amid firm wage growth momentum.

Daily digest market movers: Pound Sterling drops on firm BoE rate-cut bets

• The Pound Sterling edges lower to near 1.2825 against the US Dollar (USD) in Wednesday’s European session. The GBP/USD falls despite weakness in the US Dollar, suggesting the British currency is facing severe selling pressure. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls by 0.2% to 104.20 on the day, with investors focusing on the Federal Reserve’s (Fed) monetary policy, which will be announced on Wednesday at 18:00 GMT.
• The Fed is widely anticipated to leave interest rates unchanged in the range of 5.25%-5.50%. This would be the eighth consecutive decision to keep key borrowing rates steady at their current levels since July 2023. In spite of expectations of a steady interest rate decision, investors will remain on their toes as the Fed is expected to communicate a clear signal that rate cuts are around the corner. 
• According to the CME FedWatch Tool, 30-day Federal Fund Futures pricing data shows that the central bank reducing interest rates by 25 basis points (bps) in the September meeting is already priced in.
• Expectations for the Fed to begin reducing interest rates have been prompted by improved confidence that inflation will return to the bank’s target of 2%. The confidence was fueled by lower-than-expected readings in the United States (US) Consumer Price Index (CPI) data for May and June and a sharp deceleration in the Q2 Gross Domestic Product (GDP) Price Index. Also, moderating labor market conditions have strengthened speculation for rate cuts in September.
• In Wednesday’s session, investors will also focus on the ADP Employment Change data for July, which will be published at 12:15 GMT. The report is expected to show that labor demand in the private sector was steady as fresh payrolls were 150K, in line with June’s reading.

Technical Analysis: Pound Sterling falls below 20-day EMA

The Pound Sterling declines gradually toward the lower boundary of a rising channel chart formation on a daily timeframe. The GBP/USD pair accelerated lower after breaking below the crucial support of 1.2900. The Cable dropping below the 20-day Exponential Moving Average (EMA) near 1.2860 suggests uncertainty in the near-term trend.

The 14-day Relative Strength Index (RSI) declines toward 40.00, which would a be cushion for the momentum oscillator.

On the downside, the round-level support of 1.2800 will be a crucial support zone for the Pound Sterling bulls. Meanwhile, the two-year high near 1.3140 will be a key resistance zone for the Cable.