Pound Sterling strengthens on BoE’s less-dovish rate cut bets

• The Pound Sterling moves higher to near 1.3380 against the US Dollar on expectations of BoE’s shallow policy-easing cycle.
• UK’s overall business activity grew at a slower pace in September, according to a flash estimate.
• Traders raise Fed 50 bps rate cut bets for November.

The Pound Sterling (GBP) gains further against its major peers on Tuesday. The British currency strengthens as investors expect that the Bank of England’s (BoE) policy-easing cycle would be shallower than other central banks from Group of Seven (G-7) nations.

Financial markets expect that the BoE will cut interest rates one more time this year, which will come in any of its two monetary policy meetings remaining this year. High inflation in the United Kingdom’s (UK) service sector seems to be the major reason behind market expectations of BoE’s less-dovish interest rate outlook.

Annual service inflation, which is closely tracked by Bank of England officials, has risen sharply to 5.6% in August from 5.2% in July.

Meanwhile, the comments from BoE Governor Andrew Bailey in his speech during the European trading session on Tuesday indicated that the policy-easing cycle would be gradual.

On the economic front, Flash UK S&P Global/CIPS Purchasing Managers Index (PMI) data for September came in slightly lower but remained above the 50.0 threshold that separates expansion from contraction. The report showed that the overall private business activity fell to 52.9 from 53.8 in August due to a faster-than-expected slowdown in activities in both the manufacturing and service sectors. 

Daily digest market movers: Pound Sterling advances toward 1.3400

• The Pound Sterling extends its winning streak for the fifth trading day against the US Dollar (USD) on Tuesday. The GBP/USD pair climbs above 1.3350 as the US Dollar drops amid growing speculation that the Federal Reserve (Fed) could opt for a 50 basis points (bps) interest rate cut for the second time in a row when they meet in November. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, remains under pressure below 101.00.
• The Fed started reducing interest rates from the monetary policy meeting on Wednesday, in which the central bank cut its key borrowing rates by 50 basis points (bps) to a target range of 4.75%-5.00%. The Fed started the policy-easing cycle with a larger-than-usual rate cut as officials focused majorly on preventing job losses, with increased confidence that price pressures will return to the bank’s target of 2%.
• According to the CME FedWatch tool, the likelihood that the Fed will cut interest rates by 50 bps to 4.25%-4.50% in November is close to 51% from 29% a week ago.
• This week, investors will keenly focus on the US Personal Consumption Expenditures Price Index (PCE) data for August, which will be published on Friday. Economists expect the core PCE price index to have grown 2.7% from 2.6% in July.

Technical Analysis: Pound Sterling gains further to 1.3380

The Pound Sterling rises further to 1.3380 against the US Dollar in the European trading hours. The near-term outlook of the GBP/USD pair remains firm as all short-to-long-term Exponential Moving Averages (EMAs) are sloping higher.

Earlier in September, the Cable strengthened after recovering from a corrective move to near the trendline plotted from the December 28, 2023, high of 1.2828, from where it delivered a sharp increase after a breakout on August 21. 

The 14-day Relative Strength Index (RSI) shifts above 60.00, suggesting an active bullish momentum. 

Looking up, the Cable will face resistance near the psychological level of 1.3500. On the downside, the psychological level of 1.3000 emerges as crucial support.