Pound Sterling trades in tight range against US Dollar ahead of US inflation data

• The Pound Sterling trades sideways near 1.2750 against the USD as investors await the US inflation data for November.
• The impact of US inflation should be limited on Fed interest rate prospects unless there is a dramatic deviation from expectations.
• Investors expect the BoE to leave interest rates steady at 4.75% on December 19.

The Pound Sterling (GBP) consolidates in a tight range near 1.2750 against the US Dollar (USD) in Tuesday’s European session. The GBP/USD pair trades sideways as investors focus on the United States (US) Consumer Price Index (CPI) data for November, which will be published on Wednesday.

Economists expect the annual headline inflation to have accelerated to 2.7% from the October reading of 2.6%. In the same period, the core CPI – which excludes volatile food and energy prices – is expected to have risen steadily by 3.3%. The month-on-month headline and core CPI are estimated to have grown steadily by 0.2% and 0.3%, respectively.

Unless there is a dramatic deviation from what’s expected, the impact of the inflation data shouldn’t significantly change market expectations for the Federal Reserve’s (Fed) likely interest rate action in the policy meeting on December 18. Recent commentaries from a string of Fed officials have indicated that they are confident about inflation remaining on a sustainable path towards the bank’s target of 2%.

However, Fed Governor Michelle Bowman, a well-known hawk, said on Friday that the central bank should “proceed cautiously and gradually in lowering the policy rate, as inflation remains elevated.”

There is an almost 90% chance that the Fed will reduce interest rates by 25 basis points (bps) to 4.25%-4.50%, according to the CME FedWatch tool.

In Tuesday’s session, investors will focus on the Q3 Unit Labor Costs data, which will be published at 13:30 GMT. The economic data will indicate the total cost borne by employers for employing the labor force. The Unit Labor Cost data is estimated to have grown steadily by 1.9% compared to the previous quarter.

Daily digest market movers: Pound Sterling gains as BoE is set to leave interest rates steady next week

• The Pound Sterling performs strongly against its major peers on Tuesday in a light United Kingdom (UK) economic calendar week, with investors becoming increasingly confident that the Bank of England (BoE) will leave interest rates unchanged at 4.75% in the monetary policy meeting on December 19.
• The majority of BoE officials are expected to vote for an unchanged interest rate decision as the UK headline inflation has ticked up again after declining below the bank’s target of 2%. The BoE had already projected that inflation would pick up after coming within the bank’s desired range, suggesting that the central bank needs to do more to bring inflation down sustainably.
• Later this week, investors will focus on the UK monthly Gross Domestic Product (GDP), and Industrial and Manufacturing Production data for October. The GDP and factory data will show the current status of economic health. Economists expect the factory and GDP data to have expanded after declining in September.

Technical Analysis: Pound Sterling aims to reclaim 1.2800

The Pound Sterling strives to reclaim the key resistance of 1.2800 against the US Dollar. The GBP/USD pair holds the 20-day Exponential Moving Average (EMA) around 1.2720.

The 14-day Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting a sideways trend.

Looking down, the pair is expected to find a cushion near the upward-sloping trendline around 1.2500, which is plotted from the October 2023 low near 1.2035. On the upside, the 200-day EMA around 1.2830 will act as key resistance.