Pound Sterling slumps ahead of BoE policy outcome

• The Pound Sterling falls to nearly 1.2800 against the US Dollar ahead of the BoE policy meeting.
• Investors expect the BoE will cut interest rates by 25 bps to 5%.
• The US Dollar recovers despite the Fed’s dovish guidance on interest rates.

The Pound Sterling (GBP) faces a sharp selling pressure against its major peers in Thursday’s London session. The British currency weakens ahead of the Bank of England’s (BoE) interest rate decision, which will be announced at 11:00 GMT. 

According to Reuters, traders see a 66% chance that the BoE will cut its key borrowing rates by 25 basis points (bps) to 5%, with a 5-4 majority in the Monetary Policy Committee (MPC) vote. The BoE’s rate-cut decision would be the first since March 2020, as the central bank has been maintaining a restrictive monetary policy stance since December 2021 in an attempt to bring inflation down, driven by pandemic-led stimulus.

Market experts see the BoE rate-cut move as a tough call by policymakers as inflation in the service sector at 5.7% is significantly higher than the bank’s forecast of 5.1%. Though annual headline inflation has returned to the bank’s target of 2%, policymakers remain concerned over high service inflation and tightness in the United Kingdom (UK) labor market, which could lift price pressures again. 

BoE Chief Economist Huw Pill raised concerns over high service inflation and strong wage growth momentum in his speech before the blackout period of the BoE policy meeting. Pill said service inflation and wage growth showed "uncomfortable strength" despite the return of the headline inflation to 2%, Reuters reported.

Daily digest market movers: Pound Sterling falls sharply while US Dollar bounces back strongly

• The Pound Sterling declines to a three-week low near 1.2800 against the US Dollar (USD) in Thursday’s London session. The GBP/USD pair breaks below the three-day consolidation range as the US Dollar (USD) rises even though the Federal Reserve (Fed) has delivered dovish guidance on interest rates in its monetary policy announcement on Wednesday.
• The US Dollar has bounced back after a Fed policy-inspired sell-off as a dovish guidance was already priced in by market participants. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, moves higher to 104.20 from its intraday low of 103.86.
• The Fed left interest rates unchanged in the range of 5.25%-5.50% for the eighth consecutive meeting and acknowledged that moderation in inflationary pressures in the second quarter had increased their confidence that rate cuts could be on the table in the September meeting. The Fed admitted that risks are now widened to both aspects of dual mandate. 
• Fed’s Chair Jerome Powell said, "If we were to see inflation moving down more or less in line with expectations, growth remains reasonably strong, and the labor market remains consistent with current conditions, then I think a rate cut could be on the table at the September meeting”, Reuters reported.
• In Thursday’s session, the United States (US) ISM Manufacturing Purchasing Managers’ Index (PMI) report for July will be under the spotlight, which will be published at 14:00 GMT. The PMI report is expected to show that activities in the manufacturing sector improved, rising to 48.8 from the former reading of 48.5, but remain contracted. A figure below the 50.0 threshold is considered a contraction in factory activities. 

Technical Analysis: Pound Sterling drops to near 1.2800

The Pound Sterling comes closer to the lower boundary of a Rising Channel chart pattern on a daily timeframe. The GBP/USD pair fell on the backfoot after breaking below the crucial support of 1.2900. The Cable is an inch away from the 50-day Exponential Moving Average (EMA) near 1.2790, suggesting uncertainty in the near-term trend.

The 14-day Relative Strength Index (RSI) declines toward 40.00, which would a be cushion for the momentum oscillator.

On the downside, the round level of 1.2800 will be a crucial support zone for the Pound Sterling bulls. Meanwhile, a two-year high near 1.3140 will be a key resistance zone for the Cable.