Pound Sterling faces a sell-off on dismal market mood, BoE policy eyed

• Pound Sterling drops sharply as the downbeat market mood dampens the appeal of risk-sensitive assets.
• Investors await the BoE policy, which is seen as steady for the fourth time in a row.
• The outlook on interest rates will be of utmost importance.

The Pound Sterling (GBP) remains under pressure ahead of the interest rate decision by the Bank of England (BoE), which will be announced at 12:00 GMT. Most Monetary Policy Committee (MPC) members are expected to support maintaining the status quo as easing price pressures indicate that further quantitative tightening is not on the table. BoE policymaker Swati Dhingra, who has remained concerned about the consequences of over-tightening borrowing rates, could vote in favor of a rate cut.

BoE Governor Andrew Bailey and other members have been stating that it is too early to speculate on rate cuts despite encouraging progress in inflation declining towards 2%. UK’s headline inflation is significantly down from a multi-decade high of 11.1% to 4.0%. However, it is still double the desired rate of 2%, forcing policymakers to maintain interest rates in the restricted trajectory.

Neutral guidance on interest rates could improve the appeal of the Pound Sterling, but the outlook for the United Kingdom's economy will worsen further. The UK economy is underperforming on the grounds of consumer spending, economic activities, and the labor market. An absence of rate-cut signals would dampen the aforementioned economic triggers further.

Meanwhile, dismal market sentiment has weighed heavily on the Pound Sterling. The market mood turns vulnerable as the Federal Reserve (Fed) is in no rush to cut interest rates in March.

Daily Digest Market Movers: Pound Sterling faces pressure while US Dollar advances

• Pound Sterling has dropped to near Wednesday’s low around 1.2660 as an appeal for risk-perceived currencies faded after the Federal Reserve delivered a neutral stance for March’s monetary policy meeting.
• The Fed left interest rates unchanged on Wednesday for the fourth straight time as inflation has significantly come down all the way from a historic high of 11.1% to 4.0% in December.
• In regards to the US Dollar (USD) side of the GBP/USD pair, the Federal Reserve Chair Jerome Powell, in his monetary policy statement after Wednesday’s first meeting of 2024, said risks to achieving full employment and 2% inflation are better balanced. This proved mildly supportive for USD, which was bearish for the exchange rate.
• When asked about rate cuts in March, which would weaken the US Dollar, Powell commented that rate cuts are unlikely until they get greater confidence that inflation will come down to 2% sustainably.
• The US Dollar Index (DXY) delivered a V-shape recovery after Jerome Powell pushed back expectations of rate cuts in March to near 103.60. 
• More action in the USD Index is expected as the US Institute of Supply Management (ISM) will report the Manufacturing PMI for January, which will be published at 15:00 GMT.
• Meanwhile, a major trigger for the Pound Sterling will be the interest rate decision by the Bank of England, which is expected to remain unchanged at 5.25% for the fourth straight time.
• Unlike the European Central Bank (ECB) and the Fed, which have discussed the timing and the scope of rate cuts this year, none of the BoE policymakers have talked about starting the rate-cut process yet.
• A shift in the BoE’s stance from restrictive interest rates to rate reduction would dampen appeal for the Pound Sterling. Higher interest rates attract more foreign capital inflows, increasing demand for GBP and vice versa for lower rates.  
• Higher for longer interest rates would help bring down inflation but hurt businesses with higher borrowing costs. As such, it could be difficult for BoE policymakers to choose between high inflation and a vulnerable domestic economy.
• BoE Governor Andrew Bailey and colleagues have stressed keeping rates higher as price pressures in the UK economy are highest amongst the Group of Seven economies.
• The UK economy is on the cusp of a technical recession as it contracted by 0.1% in the third quarter of 2023, and a stagnant performance is anticipated for the last quarter of the same year.

Technical Analysis: Pound Sterling falls to near Wednesday’s low

Pound Sterling remains on the backfoot ahead of the BoE’s monetary policy decision but remains inside the last three weeks’ trading range of 1.2640-1.2775. The GBP/USD demonstrates a sharp volatility contraction on a broader timeframe, which may be the precursor of an eventual decisive break after the policy announcement by the BoE.

On the daily timeframe, a descending triangle chart pattern is in formation, which indicates indecisiveness with a slight negative bias. The downward-sloping trendline of the aforementioned chart pattern is placed from 28 December 2023 high at 1.2827 while the horizontal support is plotted from 21 December 2023 low at 1.2612. A decisive break through these boundaries would confirm a stronger directional move higher or lower – the BoE meeting may provide the catalyst. 

The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, which indicates that investors await a potential trigger for further action.