Pound Sterling clings to gains as Fed Chair Powell cautions on labor market

• The Pound Sterling exhibits strength against the US Dollar as Fed’s Powell sees softness in the US labor market strength.
• The Fed chief did not guide any specific rate-cut path.
• UK GDP for May and US Inflation for June have come under the spotlight.

The Pound Sterling (GBP) edges higher against the US Dollar (USD) in Wednesday’s early London session after a mild correction from almost a four-week high of 1.2850 this week. The broader appeal of the GBP/USD pair remains firm amid strong speculation that the Federal Reserve (Fed) will start reducing interest rates during the September meeting. 

The odds for the Fed pivoting to policy normalization remain firm even though Fed Chair Jerome Powell reiterated in his semi-annual Congressional testimony on Tuesday, refrained from providing any specific rate-cut path for this year. Powell argued in favor of maintaining interest rates at their current levels for long until they get evidence that inflation will return to the desired rate of 2%.

What was unexpected from Fed Powell’s commentary before Congress is his acknowledgement that the United States (US) economy is no longer overheated, with cooling job market conditions. Powell said that the labor market has moderated to where it was before pandemic-era.

Now that risks have become two-sided, a rate-cut move by the Fed in September appears to be a done deal. For more clarity, investors will focus on the US Consumer Price Index (CPI) report for June, which will be published on Thursday. The report is expected to show that the core inflation, which strips off volatile food and energy items, grew steadily by 0.2% and 3.4% on a monthly and annual basis, respectively. Annual headline inflation is estimated to have decelerated to 3.1% from May’s reading of 3.3%, while the monthly figure is expected to have barely grown after remaining unchanged. 

A scenario in which price pressures remain sticky or hot would ease expectations for rate cuts in September. On the contrary, soft numbers will boost them.

Daily Digest Market Movers: Pound Sterling remains firm with UK GDP in focus

• The Pound Sterling performs strongly against its major peers due to multiple tailwinds. The British currency strengthens as the outright victory of the United Kingdom (UK) Keir Starmer-led Labour Party in parliamentary elections against Rishi Sunak-led Conservative Party has brought political stability to the economy. The uncertainty over the Bank of England (BoE) rate-cut path has deepened after hawkish guidance from BoE policymaker Jonathan Haskel.
• On Monday, Jonathan Haskel, who has been amongst major hawks, said no to a rate cut in August as inflation in the labor market is still higher due to strong wage growth. Haskel said, "I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably," Reuters reported.
• On the contrary, financial markets currently expect that the BoE will begin cutting its key rates from the August meeting. The expectations for BoE rate cuts in August have been prompted by the return of the annual headline inflation to bank’s target of 2%.
• Meanwhile, investors shift focus to the monthly Gross Domestic Product (GDP) and factory data for May, which will be published on Thursday. Economists expect that the economy expanded by 0.2% after remaining unchanged in April. Industrial and Manufacturing Production are expected to have grown on a monthly and annual basis after declining in April. 

Technical Analysis: Pound Sterling aims to hold 1.2800

The Pound Sterling aims to hold the key figure of 1.2800 against the US Dollar. The GBP/USD pair gathers strength for a decisive breakout of the Inverted Head and Shoulder (H&S) chart formation on a daily timeframe whose neckline is plotted near 1.2850. A breakout of the H&S formation results in a bullish reversal.

Advancing 20-day Exponential Moving Average (EMA) near 1.2730, suggests that the near-term trend is bullish.

The 14-day Relative Strength Index (RSI) climbs into the bullish range of 60.00-80.00. A sustained move above the same will keep the momentum towards the upside.