Pound Sterling trades sideways as investors look for fresh Fed, BoE interest rate cues

• The Pound Sterling trades sideways around 1.3200 against the US Dollar, with investors focusing on the US core PCE inflation data for July.
• Fed’s Mary Daly kept doors open for an aggressive policy easing if the US labor market deteriorates.
• British shop price inflation slowed sharply in August.

The Pound Sterling (GBP) clings to gains near the round-level figure of 1.3200 against the US Dollar (USD) in Tuesday’s London session. The GBP/USD pair is sort of taking a breather after last week’s sharp increase, with investors looking for fresh cues about the likely size of the Federal Reserve (Fed) interest rate cut in September. 

According to the CME FedWatch tool, 30-day Federal Funds Futures pricing data shows that the probability of a 50-basis-points (bps) interest-rate reduction in September is 28.5%, while the rest favors a smaller cut of 25 bps. The tool unambiguously shows that the Fed’s return to policy normalization is fully priced in by traders, a move that has kept the US Dollar on the back foot for more than a week.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, exhibits a subdued performance below the immediate resistance of 101.00.

On Monday, San Francisco Fed Bank President Mary Daly emphasized the need to cut interest rates in September. Daly supported a 25 bps interest rate cut but also left doors open for a bigger one if the labor market deteriorates, she said in an interview on Bloomberg.

The confidence of investors that the Fed will begin reducing interest rates from September rose after Fed Chair Jerome Powell said that the time has come for policy to adjust in his speech at the Jackson Hole (JH) Symposium on Friday. Jerome Powell also showed concerns over easing labor market conditions and vowed to support it.

This week, investors will keenly focus on the United States (US) core Personal Consumption Expenditure Price Index (PCE) data for July, which will be published on Friday. Annual core PCE is estimated to have accelerated to 2.7% from the prior release of 2.6%, with monthly figures seen growing steadily by 0.2%. Before that, the US economic calendar will offer on Tuesday the release of the  S&P/Case-Shiller Home Price Indices for June and The Conference Board’s gauge of Consumer Confidence for August.

Daily digest market movers: Pound Sterling outperforms major peers

• The Pound Sterling exhibits strength against its major peers, except Asia-Pacific currencies, on Tuesday. The British currency capitalizes on upbeat market sentiment and an improving economic outlook in the United Kingdom (UK). Economic prospects improved after the flash S&P Global/CIPS PMI showed that activity in both the manufacturing and the service sectors rose at a faster-than-expected pace in August.
• Declining bets favoring another interest-rate cut by the Bank of England (BoE) in September have also improved the Pound Sterling’s appeal. The possibility of this scenario is low as BoE officials expect inflation to rise again even as price pressures in the pipeline seem to be abating.
• British shop prices declined in August for the first time since October 2021, data from the British Retail Consortium (BRC) reported on Tuesday shows. Prices of non-food goods dropped by 1.5% due to slower summer clothes sales, the biggest fall in three years. Food prices rose at a slower pace of 2.0%, the smallest rise since November 2021, down from 2.3% in July.
• A slowdown in the shop price inflation is unlikely to increase expectations of BoE interest rate cuts in September as officials are still concerned about sticky price pressures in the service sector due to wage pressures. However, it could boost speculation for another rate cut before the year ends.

Technical Analysis: Pound Sterling consolidates near 1.3200

The Pound Sterling turns sideways after posting a fresh two-an-a-half-year high of 1.3200 against the US Dollar. The GBP/USD pair strengthened after delivering a breakout of the Rising Channel chart formation on the weekly time frame. If bullish momentum resumes, the Cable is expected to extend its upside towards the February 4, 2022, high of 1.3640. 

The upward-sloping 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.