Pound Sterling moves higher on upbeat UK outlook, decline in US Dollar

• The Pound Sterling rises to 1.2500 on multiple tailwinds.
• BoE Governor Andrew Bailey expects a sharp drop in April’s inflation.
• The US Dollar remains under pressure ahead of US Q1 GDP and core PCE Inflation data.

The Pound Sterling (GBP) advances to near the psychological resistance of 1.2500 against the US Dollar (USD) in Thursday’s London session. The GBP/USD pair capitalizes on expectations of an improvement in the United Kingdom’s economic outlook and a decline in the US Dollar.

Investors’ confidence in the UK economy's outlook improved after the preliminary PMI report from S&P Global/CIPS for April showed that new business volumes increased across the private sector as a whole. The agency also reported that the rate of growth of overall activity was the strongest since May 2023. However, the expansion was centred on the service sector, as manufacturers saw a moderate downturn in order books.

Despite the recent upturn, downside risks to Pound Sterling remain high as investors expect the Bank of England (BoE) will pivot to interest-rate cuts before the Federal Reserve (Fed) does so. Last week, BoE Governor Andrew Bailey said: “I expect next month's inflation number will show quite a strong drop.” Bailey added that Oil prices haven't leaped as much as expected and that the effect of the Middle-East conflict “is less than feared.”

Daily digest market movers: Pound Sterling prints a fresh 10-day high

• The Pound Sterling extends its upside above Wednesday’s high at 1.2470 against the US Dollar. The recent United States preliminary PMI report has raised doubts over the strong economic outlook of the economy. Meanwhile, similar data for the UK presented a recovery in overall private-sector activity fueled by the Services sector.
• The US PMI report showed on Tuesday that surprisingly both the Manufacturing and Services PMI were down from the prior readings. The Manufacturing PMI even fell below the 50.0 threshold, signalling a contraction. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said: “The US economic upturn lost momentum at the start of the second quarter, with the flash PMI survey respondents reporting below-trend business activity growth in April. Further pace may be lost in the coming months, as April saw inflows of new business fall for the first time in six months and firms’ future output expectations slipped to a five-month low amid heightened concern about the outlook. 
• Despite the downbeat PMI figures, the speculation for the Federal Reserve beginning to lower interest rates from the September meeting remains firm. Going forward, investors will focus on the Q1 preliminary Gross Domestic Product (GDP) and the core Personal Consumption Expenditure Price Index (PCE) data for March. 
• The Q1 US GDP data, which will be published at 12:30 GMT, is expected to show that the economy expanded at a slower rate of 2.5% compared with the 3.4% growth recorded in the last quarter of 2023. The GDP data is a lagging indicator of the economic performance of an economy. A high GDP exhibits strong demand from consumers and higher production levels by firms, which are generally translated into high inflationary pressures. This will force the Fed to keep interest rates restrictive for a longer period.
• For more clarity over Fed’s rate-cut timing, investors will wait for the core PCE inflation data for March, to be published on Friday. The underlying inflation data is estimated to have grown steadily by 0.3% on month, with annual figures softening to 2.6% from the 2.8% recorded in February.

Technical Analysis: Pound Sterling climbs to 1.2500

The Pound Sterling extends its recovery to the crucial resistance of 1.2500 against the US Dollar. The GBP/USD pair moves sharply higher after finding strong buying interest near a five-month low of around 1.2300. The near-term outlook of the Cable is still bearish as the 20-day Exponential Moving Average (EMA) at 1.2509 is declining.

The 14-period Relative Strength Index (RSI) rebounds above 40.00, suggesting that a bearish momentum has concluded for now. However, the bearish bias remains intact.