Pound Sterling recovers even as Bank of England looks ready to resume rate-cut cycle

• The Pound Sterling rebounds strongly against the US Dollar, which corrects after Wednesday’s rally.
• The US Dollar should remain well-supported by Trump’s victory in the US presidential election.
• Investors await the Fed and the BoE’s monetary policy decisions, with markets expecting both central banks to cut interest rates by 25 bps.

The Pound Sterling (GBP) bounces sharply to near 1.2935 against the US Dollar (USD) in Thursday’s London session after refreshing an almost 11-week low near 1.2830 on Wednesday. The GBP/USD pair rebounds as the US Dollar (USD) corrects slightly after a sharp rally. The US Dollar Index (DXY), which gauges Greenback’s value against six major currencies, drops to near 104.90 after posting a fresh four-month high around 105.40.

The US Dollar had a strong run-up on Wednesday due to a landslide victory of Republican candidate Donald Trump over his Democratic rival Kamala Harris. The appeal of the Greenback improved sharply as Trump has vowed to raise tariffs on imports by 10% universally and lower corporate taxes if he wins the presidential elections, measures that traders interpreted as a positive for the US Dollar.

Higher tariffs could push demand for domestic output, while corporate lower taxes would leave more money in the hands of corporations, which will boost investments. A scenario that will result in higher investments, spending and labor demand will escalate price pressures and allow the Federal Reserve (Fed) to take a hawkish stance on interest rates.

To get meaningful cues about the impact of Trump’s victory on the United States (US) interest rate path and the inflation outlook, investors will focus on the Fed’s policy meeting at 19:00 GMT. Officials are widely anticipated to cut interest rates by 25 basis points (bps) to the 4.50%-4.75% range. 

Daily digest market movers: Pound Sterling outperforms major peers

• The Pound Sterling performs strongly against its major peers, except Asia-Pacific currencies, ahead of the Bank of England’s (BoE) monetary policy decision at 12:00 GMT. The BoE is expected to cut interest rates by 25 basis points (bps) to 4.75%, with a 7-2 vote split. The two divergent votes of the Monetary Policy Committee (MPC) are seen supporting leaving interest rates at the current levels.
• This will be the second interest rate cut by the BoE this year. The BoE started reducing interest rates in August by cutting borrowing rates by 25 bps, but opted to keep them steady in September.
• The press conference of BoE Governor Andrew Bailey after the policy decision will be interesting to watch. Bailey is expected to face a slew of questions regarding the impact on monetary policy and inflation from both Donald Trump’s victory in the US presidential election and the Autumn Forecast Statement presented last week.
• According to the National Institute of Economic and Social Research (NIESR), the growth rate of the UK economy could be more than halved to 0.4% if Trump implements tariff hikes as he promised in the election campaign.

Technical Analysis: Pound Sterling stays above 200-day EMA

The Pound Sterling rebounds sharply after posting a fresh 11-week low near 1.2830 against the US Dollar. The GBP/USD pair recovered after discovering buying interest near the 200-day Exponential Moving Average (EMA) around 1.2860.

However, the near-term trend remains bearish as the 20-day and 50-day Exponential Moving Average (EMAs)around 1.2990 and 1.3030, respectively, are declining.

The breakdown from the lower boundary of a rising channel on the daily time frame has also added to evidence supporting more downside.

The 14-day Relative Strength Index (RSI) hovers near 40.00. A bearish momentum would resume if the RSI (14) fails to hold this level.

Looking down, the round-level support of 1.2800 will be a major cushion for Pound Sterling bulls. On the upside, the Cable will face resistance near the psychological figure of 1.3000.