Pound Sterling strengthens amid hopes that BoE will begin rate cuts later than Fed

• Pound Sterling witnesses a significant demand as the BoE is expected to keep the restrictive policy longer.
• A hawkish interest-rate outlook has deepened UK recession fears.
• The US Dollar remains on the backfoot ahead of the US NFP data.

The Pound Sterling (GBP) prints a fresh weekly high in the early European session on Friday as the Bank of England (BoE) is expected to start reducing interest rates after the Federal Reserve (Fed) and the European Central Bank (ECB), and the risk-appetite of the market participants has improved. 

Recent monetary policy statements from Federal Reserve Chair Jerome Powell, European Central Bank President Christine Lagarde, and Bank of England  Governor Andrew Bailey indicated that the first two were more explicit about rate cuts. The Fed has already guided three rate cuts this year, and ECB’s Lagarde sees the central bank commencing the rate-reduction process in late summer. 

Like Jerome Powell, Andrew Bailey avoided speculation on rate cuts and warned that price pressures could pick up again in the second half of this year. The BoE chose to tame high price pressures over facing-off deepening recession fears. The United Kingdom economy witnessed a decline in growth of 0.1% in the third quarter of 2023, and higher interest rates are expected to continue to place barriers to economic growth.

The GBP/USD pair clings to gains but could face volatility ahead as the United States Bureau of Labor Statistics (BLS) labor report – the Nonfarm Payrolls (NFP) release for January. Upbeat labor market data would trim hopes of a rate cut by the Fed in May.

Daily Digest Market Movers: Pound Sterling advances while US Dollar faces significant pressure

• Pound Sterling hovers near a weekly high of around 1.2750 after a sharp rally against the US Dollar as investors await the United States NFP report.
• The likelihood for more upside in the Pound Sterling is high as the market sentiment is cheerful, and the Bank of England didn’t express much about interest rate cuts while providing forward guidance on interest rates in the monetary policy announcement on Thursday.
• In the monetary policy statement, BoE Governor Andrew Bailey said that a victory cannot be announced on inflation because, although price growth is expected to fall to 2% in Q2 of 2024, it is expected to pick up again in Q3.
• The BoE advocated keeping interest rates restrictive until they got enough evidence that inflation would sustainably return to the 2% target.
• While Andrew Bailey refrained from endorsing further quantitative tightening, policymakers Jonathan Haskel and Catherine Mann voted for a rate hike by 25 basis points (bps). BoE Swati Dhingra voted for a rate cut of the same size.
• Higher interest rates are expected to worsen the UK’s labor market conditions further. In the latest projections report, the BoE sees the Unemployment Rate rising to 5% by the end of 2026.
• The outlook for the UK economy is more vulnerable now as longer restrictive monetary policy could fade business optimism. Factories may refrain from fresh investment plans to avoid higher installment obligations.
• Meanwhile, the US Dollar Index (DXY) faces a sharp sell-off amid hopes that the Fed will reduce interest rates in May, even though Chair Jerome Powell refused to speculate over rate cuts. 
• Jerome Powell said interest rates needed to remain higher until the Fed gets greater confidence that inflation will return to the 2% target sustainably.
• In today’s session, market participants will focus on the US NFP report, which will be published at 13:30 GMT.
• According to the estimates, US employers hired 180K workers in January, lower than 216K recruitments in December. The Unemployment Rate is expected to increase to 3.8% against the former reading of 3.7%.
• Average Hourly Earnings data will be keenly watched apart from the labor numbers. This would provide a fresh outlook on inflation. Higher wage growth leads to an uptick in retail demand, which fuels price pressures.

Technical Analysis: Pound Sterling advances toward 1.2800

Pound Sterling seems set to extend its rally towards the round-level resistance of 1.2800, supported by multiple tailwinds. The GBP/USD pair attempts a breakout of the Descending Triangle chart pattern formed on a daily time frame. The downward-sloping trendline of the aforementioned chart pattern is placed from 28 December 2023 high at 1.2827 while the horizontal support is plotted from 21 December 2023 low at 1.2612. A decisive breakout will result in wider ticks and high volume.

The 14-period Relative Strength Index (RSI) is approaching the 60.00 hurdle. If the RSI (14) manages to sustain above the aforementioned hurdle, it will reflect a bullish turn in market sentiment.