Pound Sterling struggles to recover as BoE shifts focus to timing of rate cuts

• Pound Sterling faces pressure as the BoE turns slightly dovish.
• BoE Bailey supports market expectations for rate cuts.
• Investors await the FOMC minutes for fresh guidance.

The Pound Sterling (GBP) struggles to hold onto gains in Wednesday’s European session after printing a fresh weekly high near 1.2670. The upside move in the GBP/USD pair on Tuesday was inconsistent with the pace at which the US Dollar fell due to slightly dovish commentary from Bank of England (BoE) Governor Andrew Bailey and other policymakers speaking before UK lawmakers at the UK parliamentary Treasury Select Committee.

Andrew Bailey said market expectations for rate cuts are not “unreasonable” and there are “encouraging signs” that price pressures are easing but refused to comment on the timing and degree of restrictive policy unwinding. 

BoE Deputy Governor Ben Broadbent said the central bank's focus has shifted from the degree of restrictive monetary policy to its duration. Meanwhile, BoE policymaker Swati Dhingra warned about downside risks of restrictive interest rates to the UK economy.

In today’s session, action in the Cable will be guided by the Federal Open Market Committee (FOMC) minutes, which will be published at 19:00 GMT.

Daily Digest Market Movers: Pound Sterling is slightly positive ahead of FOMC minutes

• Pound Sterling corrects gradually to 1.2625 as the US Dollar rebounds ahead of the Federal Reserve (Fed) minutes for the January policy meeting. 
• The FOMC minutes will provide in-depth reasoning behind maintaining interest rates steady in the range of 5.25%-5.50%.
• The US Dollar Index (DXY), which measures the US Dollar’s value against six major currencies, broadly remains on the backfoot as Fed policymakers are confident that inflation is moving in the right direction.
• The Pound Sterling fails to hold gains as Bank of England Governor Andrew Bailey and his teammates said rate cuts can be announced before inflation declines to their 2% target whilst speaking before the United Kingdom parliament’s Treasury Select Committee on Tuesday.
• Andrew Bailey denied to comment on the timing of rate cuts, however, he supported market expectations for the unwinding of historically restrictive interest rate stance.
• Bailey warned about inflation picking up again after returning temporarily to the desired target in spring. He said the BoE wants to achieve price stability sustainably.
• When asked about the economic outlook, Andrew Bailey said the technical recession in the second half of 2023 was historically modest, and an upturn is probably underway.
• Meanwhile, BoE Deputy Governor Ben Broadbent said the labor market is releasing some heat, which indicates that current monetary policy is sufficiently restrictive.
• Ben Broadbent added that the central bank has shifted its focus to the duration of holding interest rates at 5.25%, but rate cuts are not desirable at the current stage due to insufficient evidence.
• Broadbent’s view is based on data that indicates wage growth and service inflation are double the pace consistent with sustainable consumer price inflation.
• Going forward, the preliminary S&P Global/CIPS PMI data for February will guide further action in the Pound Sterling, which will be published on Thursday.
• The Manufacturing PMI is expected to come out below the 50.0 threshold at 47.5, higher than the former reading of 47.0.

Technical Analysis: Pound Sterling falls back from 1.2670

Pound Sterling faces pressure while attempting to recapture a two-week high of 1.2684. The GBP/USD pair is broadly sideways amid a Descending Triangle formation on a daily timeframe. The aforementioned chart pattern indicates a sharp contraction of volatility but with a slightly negative bias due to the formation of lower highs.

The downward-sloping border of the Descending Triangle pattern is plotted from December 28 high at 1.2827, while the horizontal support is placed from December 13 low near 1.2500.

The 20 and 50-day Exponential Moving Averages (EMAs) near 1.2630 continue to act as a barricade for the Pound Sterling bulls.

Meanwhile, 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating an indecisiveness among market participants.