Pound Sterling grips gains ahead of UK inflation data, Fed-BoE policy decisions

• The Pound Sterling holds gains near 1.3200 against the US Dollar as bets supporting the Fed to opt for a large interest-rate cut surge.
• Investors expect the BoE to leave interest rates unchanged at 5% on Thursday.
• The UK core CPI is estimated to have accelerated to 3.5% in August.

The Pound Sterling (GBP) edges lower against the US Dollar (USD) but clings to gains near the round-level support of 1.3200 in Tuesday’s London session. The outlook of the GBP/USD pair remains firm as the US Dollar remains under pressure ahead of the Federal Reserve’s (Fed) monetary policy decision on Wednesday.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers close to a year-to-date (YTD) low near 100.50 amid firm speculation that the Fed will start its policy-easing cycle aggressively. 

The Fed is widely expected to cut interest rates for the first time in more than four years. The Fed has maintained a restrictive monetary policy stance due to a fierce battle against stubborn inflation, which was prompted by pandemic-led stimulus.

Market expectations for the Fed to begin reducing interest rates by a wide margin have risen overnight after dovish comments from Jon Faust, a former senior adviser to Fed Chairman Jerome Powell, in comments to the Wall Street Journal (WSJ). Faust said that his preference “would be slightly toward starting with 50 (basis-points interest-rate cut)”  as he thinks that several policymakers would forecast a 100-bps interest rate cut by the year-end. “If that is the case, leading off with a 25-basis-point cut risks raising awkward questions over why officials expect to deliver a larger rate cut later this year but didn’t lead with it”, he said.

According to the CME FedWatch tool, the probability of the Fed reducing interest rates by 50 bps to 4.75%-5.00% in September has increased sharply to 69% from 34% a week ago.

In Tuesday’s session, investors will focus on the monthly United States Retail Sales data for August, which will be published at 12:30 GMT. The Census Bureau is expected to report that Retail Sales, a key measure for consumer spending, grew by 0.2%, slower than the 1% increase seen in July.

Daily digest market movers: Pound Sterling to be influenced by UK August inflation data 

• The Pound Sterling weakens slightly against its major peers on Tuesday. The British currency appears to perform cautiously as investors await the United Kingdom (UK) Consumer Price Index (CPI) data for August, which will be published on Wednesday. The inflation data will significantly influence market speculation for the Bank of England (BoE) interest rate path for the last quarter of the year as it is expected to leave interest rates unchanged on Thursday.
• The UK CPI report is expected to show that the annual core inflation – which excludes volatile components such as food, energy, alcohol, and tobacco – grew at a faster pace of 3.5% from 3.3% in July, with headline inflation steady at 2.2%. Any signs showing that UK inflation remains persistent would result in the BoE emphasizing the need to keep interest rates unchanged at their current levels in November’s policy meeting. On the contrary, soft inflation figures would allow the BoE to deliver dovish guidance. Currently, financial market participants expect that the BoE will cut interest rates one more time, either in November or in December.
• In the UK CPI report, investors will keenly focus on the Service inflation data, which is closely tracked by BoE officials. In July, annual service inflation decelerated sharply to 5.2%, the lowest figure in more than two years.

Technical Analysis: Pound Sterling grips gains near 1.3200

The Pound Sterling holds gains near 1.3200 against the US Dollar in European trading hours. The near-term outlook of the GBP/USD pair remains firm as it holds above the 20-day Exponential Moving Average (EMA) near 1.3100. Earlier, the Cable strengthened after recovering from a corrective move to near the trendline plotted from the December 28, 2023, high of 1.2828, from where it delivered a sharp increase after a breakout on August 21. 

The 14-day Relative Strength Index (RSI) stands above 60.00. A fresh round of bullish momentum could occur if the oscillator sustains around this level.

Looking up, the Cable will face resistance near the August 27 high of 1.3266 and the psychological level of 1.3500. On the downside, the psychological level of 1.3000 emerges as crucial support.