Pound Sterling struggles after US CPI data cements small Fed rate cut bets

• The Pound Sterling edges slightly up against the US Dollar, but a decline in bets that the Fed will opt for a large rate cut keeps the downside bias afloat.
• Investors see the BoE leaving interest rates unchanged at 5% at its September meeting.
• Market participants await the US PPI report for August.

The Pound Sterling (GBP) holds the late Wednesday’s recovery move from the psychological support of 1.3000 to near 1.3050 against the US Dollar (USD) in Thursday’s London session. However, the outlook of the GBP/USD pair is tilted to the downside as the US Dollar clings to gains near a fresh weekly high, with investors gaining confidence that the Federal Reserve (Fed) will start the policy-easing process with a 25-basis-points interest-rate cut.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds gains near 101.70. Investors have been speculating for weeks about the size of the upcoming Fed rate cut. Expectations for a small 25-basis-points interest-rate cut have strengthened after the Consumer Price Index (CPI) data for August, released on Wednesday, showed signs of some stickiness in inflationary pressures. 

Annual headline inflation came in lower than anticipated. However, the core inflation data  – which excludes volatile food and energy prices – remained sticky. Core inflation rose by 3.2% as expected, but the monthly figure grew by 0.3%, faster than the 0.2% anticipated.

Sticky US core inflation data significantly weighed on market expectations for sizable Fed rate cuts. According to the CME FedWatch tool, the probability of the Fed reducing interest rates by 50 basis points (bps) to 4.75%-5.00% in September has diminished to 13% from 40% a week ago.

In Thursday’s session, investors await the United States (US) Producer Price Index (PPI) data for August and the Initial Jobless Claims for the week ending September 6. Both reports will be published at 12:30 GMT. 

The headline producer inflation data is expected to have slowed further due to falling energy prices, while core figures are projected to have accelerated.

Daily digest market movers: Pound Sterling wobbles against US Dollar

• The Pound Sterling ticks up against its major peers, except Asia-Pacific currencies, in Thursday’s European trading hours. The British currency rises as market participants seem confident that the Bank of England’s (BoE) policy-easing cycle will be less aggressive than that of other central banks. 
• According to a Reuters poll, the BoE is expected to leave interest rates unchanged at 5% next week but is expected to reduce them again in November despite inflation remaining above the bank’s target of 2%. The comments from BoE Governor Andrew Bailey at the Jackson Hole (JH) Symposium also indicated that the central bank will cut interest rates gradually to keep a lid over inflationary pressures.
• An increase in market expectations for the BoE, keeping interest rates steady this month, appears to be the outcome of robust job growth and a decline in the Unemployment Rate. In the three months ending July, the jobless rate fell to 4.1%, while UK employers hired 265K new workers, a significantly higher number than the former release of 24K.
• Going forward, the next big triggers for the Pound Sterling will be the United Kingdom (UK) Consumer Price Index (CPI) data for August and the BoE’s interest rate decision, which are scheduled for next week.

Technical Analysis: Pound Sterling rises slightly to near 1.3050

The Pound Sterling edges higher against the US Dollar to near 1.3050, recovering from 1.3000. However, the near-term outlook of the Cable has become gloomy as the pair’s price action falls below the trendline plotted from the December 28, 2023, high of 1.2828 – from where it delivered a sharp upside move after a breakout on August 21. Also, a downside move below the 20-day Exponential Moving Average (EMA) near 1.3070 has weakened the Pound Sterling’s appeal.

The 14-day Relative Strength Index (RSI) declines into the 40.00-60.00 range, suggesting that the bullish momentum has concluded for now. However, the long-term bullish trend remains intact.

Looking up, the Cable will face resistance near the round-level at 1.3200 and the psychological level of 1.3500. On the downside, the psychological level of 1.3000 emerges as crucial support for the Pound Sterling bulls.