Pound Sterling ticks down amid uncertainty ahead of US core PCE Inflation

• The Pound Sterling is down slightly against the US Dollar ahead of the US core PCE inflation data.
• The underlying US inflation data is expected to have grown steadily.
• UK business optimism improves due to cooling inflationary pressures and expectations for BoE rate cuts.

 The Pound Sterling (GBP) comes under pressure in Friday’s early London session as a sharp recovery move from four-day low near 1.2680 appears to be stalled. The GBP/USD treads cautiously amid uncertainty ahead of the United States core Personal Consumption Expenditure Price Index (PCE) data for April, which will be published at 12:30 GMT.

The core PCE Inflation data, which is Federal Reserve’s (Fed) preferred inflation tool, is estimated to have gown steadily by 0.3% and 2.8% on monthly and annual basis, respectively. Investors will keenly focus on the underlying inflation data as it will provide significant cues about the Fed’s rate-cut path.

In-line numbers will less likely prompt expectations of rate-cuts in the September meeting as Fed policymakers want to see inflation declining for months before considering a policy normalization move. Hot inflation reading would significantly impact market speculation for the Fed reducing interest rates in November too. While soft figures would boost prospects of Fed lowering key borrowing rate from September.

Daily digest market movers: Pound Sterling drops amid uncertain market sentiment

• The Pound Sterling edges down to 1.2720 against the US Dollar (USD). The Cable struggles to extend recovery as the US Dollar stabilizes after a steep correction induced by downwardly revised US Q1 Gross Domestic Product (GDP) data on Thursday. The US Bureau of Economic Analysis (BEA) reported that the economy expanded at a slower pace of 1.3% due to lower consumer spendings from the preliminary estimates of 1.6%.
• Downwardly revised GDP estimates weighed on the US Dollar as market speculation for the Fed lowering interest rates from September edged up slightly above 50%. However, Fed rate-cut prospects will be meaningfully influenced by the core PCE Inflation data.
• Meanwhile, Fed policymakers continue to emphasize keeping interest rates at their current levels until they get sufficient evidence that inflation will sustainably return to the desired rate of 2%. On Thursday, Dallas Federal Reserve Bank President Lorie Logan said inflation is on course to return to 2% but the path appears to be slower and bumpier than expected at the beginning of the year. Therefore, it is too early to consider rate cuts.
• On the United Kingdom (UK) front, the outlook for the economy has improved after a survey by Lloyds Bank showed that easing price pressures and firm expectations for the Bank of England (BoE) starting to reduce interest rates sooner have pushed business optimism to highest since November 2015. Lloyds Bank Business Barometer jumps to 50% in Maym advanced by eight points.
• Due to absence of top-tier UK economic data, investors look for developments in upcoming elections. Exit polls show that the Labour Party will come in power after almost 15 years.
• The Pound Sterling could remain slightly volatile due to market expectations for elections but its impact on the monetary policy is expected to light. The outlook of UK economy will change drastically if the Labour Party comes into power but their fiscal plans are expected to remain conservative to avoid any upside risk to price pressures.

Technical Analysis: Pound Sterling holds 1.2700

The Pound Sterling exhibits a subdued performance against the US Dollar ahead of the US core PCE Price Index data for April. The near-term outlook of the GBP/USD pair remains upbeat as it holds the 61.8% Fibonacci retracement support (plotted from the March 8 high of 1.2900 to the April 22 low at 1.2300) at 1.2670.

The Cable is expected to remain in the bullish trajectory as all short-to-long-term Exponential Moving Averages (EMAs) are sloping higher, suggesting a strong uptrend.

The 14-period Relative Strength Index (RSI) has slipped into the 40.00-60.00 range, suggesting that the momentum, which was leaned toward the upside has faded for now.