Pound Sterling gains as BoE Bailey sticks to gradual easing approach

• The Pound Sterling rises as BoE Governor Andrew Bailey sticks to follow a gradual policy-easing approach.
• Financial market participants expect the BoE to keep interest rates steady in the policy meeting on December 19.
• Fed Powell expects that the central bank has the comfort of becoming “cautious” on interest-rate cuts.

The Pound Sterling (GBP) gains against its major peers on Thursday amid firm expectations that the Bank of England (BoE) will follow a gradual approach while lowering its key borrowing rates compared to other central banks. 

BoE Governor Andrew Bailey said on Wednesday that interest rates should be cut “gradually” in a Financial Times (FT) Global Boardroom event, adding that the progress in taming price pressures is holding up. "This sort of disinflation process is now well embedded,” Bailey said.

However, Bailey also emphasized that the central bank has still some work to do to bring inflation down below the bank’s target of 2%. Bailey added that price pressures have ticked up after returning to the bank’s target, a scenario that was already anticipated by the BoE.

When asked about the interest-rate path ahead, Bailey said he sees four interest-rate cuts next year. The initial reaction from his commentary was negative for the Pound Sterling, but the currency managed to recover strongly as some of Bailey’s comments also pointed to caution. While the BoE Governor didn’t offer any cues about the decision in the monetary policy meeting on December 19, traders expect the BoE to leave interest rates unchanged at 4.75%.

In Thursday’s session, investors will focus on BoE Monetary Policy Committee (MPC) external member Megan Greene’s commentary at the Global Boardroom event organized by the Financial Times (FT), which is scheduled at 17:00 GMT.

Daily digest market movers: Pound Sterling outperforms US Dollar

• The Pound Sterling advances to nearly 1.2740 against the US Dollar (USD) in Thursday’s London session. The GBP/USD pair gains as the US Dollar slumps even though Federal Reserve (Fed) Chair Jerome Powell delivered slightly hawkish remarks in his commentary at the New York Times DealBook Summit on Wednesday.
• “We can afford to be a little more cautious as we try to find neutral,” Jerome Powell said.  His comments were backed by the assumption that the economy is stronger than what the central bank had anticipated in September, downside risks in the labor market appear to be fading and inflation has come in a little higher than anticipated.
• Though Powell's comments were less dovish, they failed to tamper market speculation for the Fed to cut interest rates in December. According to the CME FedWatch tool, there is a 74% chance that the Fed will reduce its key borrowing rates by 25 basis points (bps) to 4.25%-4.50%, marginally higher than the 73% seen on December 3.
• Going forward, investors will focus on the US Nonfarm Payrolls (NFP) data for November, which will be released on Friday. The NFP report is expected to show that the US economy added 200K fresh workers, significantly higher than 12K in October. The NFP report stated that payroll employment estimates in some industries were affected by the hurricanes last month. The Unemployment Rate is estimated to have increased to 4.2% from the former release of 4.1%.

Technical Analysis: Pound Sterling climbs to near 1.2740

The Pound Sterling jumps to near 1.2740 against the US Dollar in European trading hours on Thursday. The GBP/USD pair wobbles near the 20-day Exponential Moving Average (EMA) around 1.2715. However, the outlook remains bearish as the pair stays below the 200-day Exponential Moving Average, which trades around 1.2825.

The 14-day Relative Strength Index (RSI) has rebounded after turning oversold on November 22. However, the downside bias is still intact.

Looking down, the pair is expected to find a cushion near the upward-sloping trendline around 1.2500, which is plotted from the March 2023 low near 1.1800. On the upside, the 200-day EMA will act as key resistance.