Pound Sterling clings to gains as Fed Powell gives green light to September rate cuts

• The Pound Sterling holds strength against the US Dollar to near 1.3200 driven by the Fed’s Powell dovish guidance on interest rates.
• Fed Powell’s comments suggested he remains concerned over downside risks to the US labor market.
• BoE’s Governor Andrew Bailey refrained from committing a specific interest-rate cut path.

The Pound Sterling (GBP) trades close to an almost two-and-a-half-year high near 1.3200 against the US Dollar (USD) in Monday’s London session. The GBP/USD pair aims to extend its seven-day winning streak as the US Dollar weakens after the unambiguous announcement from Federal Reserve (Fed) Chair Jerome Powell, who said that the central bank will start cutting interest rates in September.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers near a fresh year-to-day (YTD) low of 100.53.

In the speech at the Jackson Hole (JH) Symposium on Friday, Fed Powell said: “The time has come for policy to adjust.” However, he refrained from committing to a preset interest-rate cut path and preferred to remain data-dependent, saying that "the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks."

Powell’s comments indicated that the central bank is now more worried about deteriorating labor market conditions and that he is confident that price pressures will return to the desired target of 2%. He commented that upside risks to inflation have diminished and downside risks to the labor market have increased. “We will do everything we can to support a strong labor market as we make further progress toward price stability," Powell added.

This week, the major trigger for the US Dollar will be the United States (US) core Personal Consumption Expenditure Price Index (PCE) data for July, which will be published on Friday. Month-over-month, PCE inflation is estimated to have grown steadily by 0.2%.

In Monday’s session, investors will focus on the US Durable Goods Orders data for July, which will be published at 12:30 GMT. New Orders for Durable Goods, a key measure of core consumer inflation, is estimated to have grown at a robust pace of 4% after a significant decline in June. Nothing will come from the Pound Sterling side as the United Kingdom (UK) is on a bank holiday.

Daily digest market movers: Pound Sterling capitalizes on optimism over BoE’s gradual  policy easing

• The Pound Sterling performs strongly against its major peers, except for Asia-Pacific currencies, at the start of the week. The British currency gains as the Bank of England (BoE) is reluctant to offer a preset rate-cut path given that the victory over inflation in the UK is far from over.
• BoE Governor Andrew Bailey signaled in his speech at the JH Symposium on Friday that the second-round effects of inflationary pressures could be smaller than expected, but added that the central bank should not rush for more interest rate cuts, Reuters reported. The BoE would "be careful not to cut interest rates too quickly or by too much," Bailey said.
• Andrew Bailey also ruled out the risks of a potential recession and assured that the steady disinflation in the UK is aligned with the aim of achieving a soft landing for the economy.
• This week, the Pound Sterling will be guided by the market speculation for BoE interest rate cuts amid an absence of top-tier economic data in the UK. Currently, market participants expect that the BoE will deliver one more interest-rate cut this year. The BoE opted for a cut on August 1, with a close 5-4 split among its Monetary Policy Committee members. However, a slew of upbeat economic data, including stronger-than-expected flash S&P Global/CIPS PMI for August, has weighed on expectations for another rate cut in September.

Technical Analysis: Pound Sterling posts fresh two-and-a-half year high near 1.3200

The Pound Sterling softens slightly against the US Dollar but remains close to 1.3200 after delivering a breakout of the Rising Channel chart formation on the weekly time frame. The GBP/USD pair posts a fresh, almost two-and-a-half-year high, and it is expected to extend its upside towards the February 4, 2022, high of 1.3640. 

The upward 20-week Exponential Moving Average (EMA) near 1.2766 suggests a strong upside trend.

The 14-period Relative Strength Index (RSI) oscillates in the bullish range of 60.00-80.00, suggesting a strong upside momentum. Still, it has reached overbought levels at around 70.00, increasing the chances of a corrective pullback. On the downside, the psychological level of 1.3000 will be the crucial support for the Pound Sterling bulls.