Pound Sterling falls from fresh highs as focus shifts to US core PCE inflation

• The Pound Sterling drops to near 1.3230 against the US Dollar as the latter gains temporary ground.
• Economists expect annual core PCE inflation to accelerate to 2.7%.
• For fresh cues on the BoE interest rate path, investors await Catherine Mann’s speech at 12:15 GMT.

The Pound Sterling (GBP) declines from a more-than-two-year high of 1.3266 against the US Dollar (USD) in Wednesday’s London session. The GBP/USD pair drops as the US Dollar recovers some ground, with investors focusing on the United States (US) core Personal Consumption Expenditure Price Index (PCE) data for July, to be published on Friday, as it could be the next big trigger for the pair.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, discovers some buying interest as value-buying kicked in after posting a fresh year-to-date (YTD) low at 100.50.

Despite the recent recovery, the near-term outlook of the US Dollar is still downbeat as investors are certain about the Federal Reserve (Fed) reducing interest rates at its September meeting. Traders debate now over whether the Fed will deliver a sizeable interest rate cut or will stick to a small reduction in borrowing costs. 

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 34.5%, while the rest are favoring a cut by 25 bps.

As for core PCE inflation, economists expect that year-on-year the Fed’s preferred inflation gauge rose at a faster pace of 2.7% from 2.6% in June, with monthly figures growing steadily by 0.2%. Signs of inflation remaining persistent would dampen market speculation for a large rate cut by the Fed, while a further decline in price pressures will boost them.

Daily digest market movers: Pound Sterling to be guided by BoE Mann’s speech

• The Pound Sterling exhibits a mixed performance against its major peers in Wednesday’s European trading hours. The British currency is expected to trade broadly sideways as investors look for fresh cues about the Bank of England’s (BoE) interest rate path.
• The BoE cut interest rates by 25 basis points (bps) to 5% in August, ending its two-and-a-half year-long restrictive monetary policy stance, as officials gained confidence that price pressures will return to the bank’s target of 2% sustainably. 
• Market participants expect that the BoE’s interest rate reduction path for the rest of this year will be slower than that of other central banks because the United Kingdom (UK) economy seems to be holding up well, according to the flash S&P Global/CIPS PMI for August and robust Q2 Gross Domestic Product (GDP) growth.
• For fresh guidance on interest rates, investors await BoE policymaker Catherine Mann’s speech, which is scheduled at 12:15 GMT. Mann was among those policymakers who voted for leaving interest rates steady at 5.25% in the monetary policy meeting on August 1. Investors would look for cues about how much the BoE will cut interest rates this year along with an outlook on service inflation and wage pressures.
• On the political front, United Kingdom (UK) Prime Minister Keir Starmer's commentary on the financial budget's outlook, which will be announced in October, has also improved the Pound Sterling’s appeal. Starmer said that the fiscal budget is expected to be tight, specifically that "the budget will be short-term pain for long-term gain," with the intention of increasing the tax burden on households, especially on individuals with higher incomes.

Technical Analysis: Pound Sterling holds key support of 1.3200

The Pound Sterling corrects mildly after posting a fresh two-and-a-half-year high of 1.3266 against the US Dollar. The near-term appeal of the GBP/USD pair remains firm as it holds the 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 1.3000 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.