Pound Sterling faces sell-off on dismal market mood ahead of Fed, BoE decisions

• The Pound Sterling drops amid uncertainty over the Fed and theBoE monetary policy meetings.
• The Fed and the BoE are widely expected to leave interest rates unchanged.
• UK business optimism improves due to soft inflation outlook and expectations of upcoming rate cuts.

The Pound Sterling (GBP) remains under pressure on Wednesday’s European morning as markets brace for the US Federal Reserve’s (Fed) monetary policy meeting. Investors see the Fed leaving interest rates unchanged in the range of 5.25%-5.50%, shifting their focus towards any  guidance about when the central bank will start cutting interest rates and at which speed. In its last monetary policy meeting, the Fed projected a 75-basis-points (bps) reduction in interest rates in 2024.

The GBP/USD pair trades broadly sideways, but a defined action is expected after the Fed and Bank of England (BoE) announce their first monetary policy decisions of 2024. The BoE is also expected to maintain the status quo for the fourth time in a row. Price pressures in the United Kingdom economy have peaked now, but  investors lack confidence about inflation returning to the 2% target in a sustainable manner.

Apart from the Fed decision, market volatility is expected to increase later this Wednesday as investors will focus on the US Automatic Data Processing (ADP) Employment Change data for January. This will be followed by the Institute of Supply Management (ISM) Manufacturing PMI and Nonfarm Payrolls (NFP) data, which will be published on Thursday and Friday, respectively.

Daily digest market movers: Pound Sterling falls while USD Index advances on risk-off mood

• The Pound Sterling remains under pressure as the market mood is quite cautious ahead of the interest rate decision by the Federal Reserve.
• The Fed is anticipated to maintain status-quo, suggesting there is no rush for delivering a dovish signal as inflation in the United States economy is still far from the desired rate of 2%.
• The progress in inflation declining towards the 2% target has slowed as labor market conditions are strong, consumer spending is robust, and the economy is growing at a stronger pace.
• Further moves in the Pound Sterling will also be driven by the Bank of England’s monetary policy decision, which will be announced on Thursday.
• Like the Fed, the BoE is expected to deliver a steady interest rate decision for the fourth straight time, leaving interest rates unchanged at 5.25%.
• As an unchanged monetary policy decision is widely anticipated, market participants will majorly focus on the interest rate outlook.
• Unlike the Fed and the European Central Bank (ECB), BoE policymakers have not discussed the timing or scope of interest rate cuts in 2024. Therefore, discussions about rate cuts would be considered as bearish for the Pound Sterling.
• The reasoning behind BoE’s emphasis on keeping interest rates at the current levels is elevated inflation, which is higher in the UK in comparison with other members of the Group of Seven economies.
• Meanwhile, vulnerable economic growth could be a factor that will force BoE policymakers to discuss rate cuts.
• The Lloyds Bank Business Barometer rose to a two-year high of 44% amid hopes of softer inflation and interest rate cuts. The survey showed that businesses are planning to increase their workforce ahead.
• Meanwhile, the US Dollar Index (DXY) rises as the appeal for safe-haven assets improves ahead of the Fed’s decision.
• Apart from the Fed’s policy decision, investors will focus on the ADP Employment Change data for January, which will be published at 13:15 GMT. Investors anticipate that US private employers hired 145K job-seekers, lower than 164K payroll additions in December.

Technical Analysis: Pound Sterling remains below 1.2700

Pound Sterling faces a sell-off ahead of the Fed’s interest rate policy. The GBP/USD pair continues to face pressure near the round-level resistance of 1.2700. The Cable has been stuck in a tight range between 1.2640-1.2775 during the last two weeks. 

A descending triangle formation is visible on the daily timeframe, which indicates that investors are on the sidelines. The horizontal support of the aforementioned chart pattern is plotted from the December 21 low at 1.2612, while the downward-sloping trendline is placed from the December 28 high at 1.2827. The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, which indicates a lackluster move ahead.