Pound Sterling clings to gains ahead of BoE policy meeting

• Pound Sterling recovers further ahead of the BoE’s monetary policy decision.
• The BoE is expected to keep interest rates steady at 5.25% due to a weakening economy and falling inflation.
• Discussion about interest-rate cuts could spoil the Pound Sterling’s recovery.

The Pound Sterling (GBP) extended recovery on Thursday, trading at 1.2650 against the US Dollar in the European morning session, capitalizing on the surprisingly dovish guidance from the US Federal Reserve (Fed). Power-pack action will continue for the Pound Sterling as the Bank of England (BoE) is set to announce its last monetary policy of 2023 at 12:00 GMT. 

Markets widely anticipate the BoE to hold interest rates steady at 5.25% for the third straight meeting due to deepening recession fears and easing inflation. However, policymakers could emphasize the need to maintain the “higher for longer” narrative in interest rates to ensure price stability.

The shrinking UK economy has put UK Prime Minister Rishi Sunak’s promise of ramping growth in jeopardy as the economy is struggling to absorb the consequences of higher interest rates. This could dampen the outlook of GBP/USD ahead.

Daily Digest Market Movers: Pound Sterling capitalizes on risk-on mood

• Pound Sterling holds onto gains, inspired by an unchanged interest rate decision from the Fed for the third time in a row along with a dovish guidance by Fed Chair Jerome Powell.
• Further action in the Pound Sterling would be guided by the interest rate decision from the BoE, which will be announced at 12:00 GMT.
• Investors see the BoE keeping interest rates unchanged at 5.25%for the third consecutive time, but markets also expect BoE members to support keeping interest rates “higher for longer” to ensure the achievement of price stability.
• Easing price pressures, falling pay growth, and a shrinking economy would be the supportive factors for maintaining a status quo by the BoE.
• In the three months to October, earnings excluding bonuses grew at a slower pace of 7.3% against expectations of 7.4% and the former reading of 7.8%. Wage growth is slowing but it is still high. 
• UK’s headline inflation has sharply declined to 4.6% in October. 
• Monthly Gross Domestic Product (GDP) contracted 0.3% in October, more than the 0.1% forecasted by markets.  This is the first contraction since July. The Office for National Statistics (ONS) attributed exceptionally wet weather to the decline in GDP. 
• A significant fall in Manufacturing and Industrial Production has raised concerns of a potential recession in the UK economy.
• With a sharp decline in the UK’s economic activity, BoE policymakers are expected to follow the footprints of the Fed and will discuss cutting interest rates in 2024.
• UK Chancellor Jeremy Hunt said that a sharp impact of higher interest rates on the economy was inevitable. 
• The market mood favors risk-perceived assets as Jerome Powell remained surprisingly dovish while guiding further monetary policy action on Wednesday.
• The Fed lowered their core Personal Consumption Expenditure (PCE) projections for 2024 and 2025 and hinted at three rate cuts in 2024. 
• A “soft landing” scenario from the Fed is highly anticipated, which indicates that the economy has managed to tame inflation without any economic collapse and higher jobless rates.

Technical Analysis: Pound Sterling recovers to near 1.2650

Pound Sterling clings to gains ahead of the interest rate decision by the BoE. The GBP/USD pair trades near a nine-day high of around 1.2650 after a sharp recovery from the psychological support of 1.2500.

On a broader note, more strength in the Pound Sterling would allow the GBP/USD pair to re-test November’s high around 1.2733, which coincides with the 61.8% Fibonacci retracement. The 20-day Exponential Moving Average (EMA) at 1.2557 is expected to continue to provide support to the Pound Sterling bulls.