Pound Sterling seeks fresh guidance on interest rates

• Pound Sterling trades back and forth ahead of BoE Pill’s commentary.
• High wage growth and service inflation keep the UK’s inflation sticky.
• The core PCE inflation data will guide further action in the US Dollar.

The Pound Sterling (GBP) is stuck in a tight range in Monday’s European session as investors need more insights on the Bank of England’s (BoE) interest rates for fresh action. The GBP/USD struggles for direction as uncertainty over the timing of rate cuts by the BoE and the Federal Reserve (Fed) continues to persist.

Policymakers from the BoE and the Fed are reluctant to offer details on the timing of rate cuts as they need more evidence to confirm that inflation will come down to the 2% target. The United Kingdom’s wage growth and service inflation are skewed to the upside, remaining inconsistent with the rate required to achieve price stability. 

The US Dollar Index (DXY), which gauges the value of the US Dollar against six rival currencies, oscillates in a range around 104.00 amid a data-packed week. Investors will keenly watch the core Personal Consumption Expenditure price index (PCE) data for January, which will deliver a meaningful outlook on interest rates. 

Daily Digest Market Movers: Pound Sterling juggles amid quiet market mood

• Pound Sterling consolidates in a tight range around 1.2660 as investors await fresh guidance on the Bank of England’s interest rates.
• The market expectations for early rate cuts are waning due to higher wage growth.
• In a testimony before the UK Parliaments’ Treasury Committee, BoE Deputy Governor Ben Broadbent said the momentum in wage growth is double that required to bring down inflation to its 2% target.
• Investors await the commentary from BoE Chief Economist Huw Pill for fresh interest rate guidance, which is scheduled at 11:00 GMT.
• BoE Pill is expected to reiterate the need for maintaining interest rates unchanged at 5.25% until they get convinced that inflation will sustainably return to the desired rate.
• Investors will keenly focus on commentary over concrete timing for rate cuts.  
• Meanwhile, improving business optimism and economic outlook are a relief for BoE policymakers.
• This would allow the BoE to avoid a “hard landing” in the battle against stubborn inflation. The hard landing indicates a sharp contraction in economic activities while achieving price stability.
• While economists are anticipating an uptick in economic activities, recruitment data company Adzuna showed that job postings by British employers were hit significantly in January.
• The agency reported that job advertisements were 15% down annually at 867,000. 
• "January 2024 has proven to be one of the most difficult starts to the year for job hunters in recent years with companies continuing to put hiring plans on ice," Adzuna co-founder Andrew Hunter said.
• Cooling labor market conditions would tame strong wage growth and will eventually provide a sigh of relief to BoE policymakers.
• Meanwhile, the US Dollar remains subdued even though investors have been convinced that the Federal Reserve (Fed) will not cut interest rates in the March-May monetary policy meetings.
• Last week, New York Federal Reserve President John Williams said rate cuts are on track later this year. When asked about sticky January Consumer Price Index (CPI) data, Williams said "My overall view of the economy basically hasn't changed based on one month of data."

Technical Analysis: Sharp volatility contraction to signal breakout to come

Pound Sterling trades inside Friday’s trading range as investors need fresh cues over the interest rate outlook. The broader outlook is sideways too as the pair oscillates in the Descending Triangle pattern formed on a daily timeframe. The aforementioned chart pattern indicates a sharp volatility contraction, carrying a slightly negative bias due to its formation of lower highs.

The horizontal support is plotted from December 13 low near 1.2500, while the downward-sloping border of the Descending Triangle pattern is placed from December 28 high at 1.2827. The pair holds above the 20 and 50-day Exponential Moving Averages (EMAs), which trade around 1.2630. Meanwhile, the 14-period Relative Strength Index (RSI) trades in the 40.00-60.00 region, indicating indecisiveness among market participants