Pound Sterling strengthens after UK economy grows as expected in Q2

• The Pound Sterling moves higher as the UK's GDP growth for the second quarter was in line with estimates.
• Easing UK service inflation has resulted in a big relief for BoE policymakers.
• A moderate increase in US inflation has set the stage for a Fed rate cut in September.

The Pound Sterling (GBP) exhibits a strong performance against its major peers, except the Australian Dollar (AUD), in Thursday’s London session. The British currency gains further as the United Kingdom (UK) Office for National Statistics (ONS) has reported that the economy expanded in line with expectations in the second quarter of this year.

The flash Gross Domestic Product (GDP) report showed that the UK economy grew by 0.6% and 0.9% on a quarterly and an annual basis, respectively. The pace at which the economy grew in the second quarter was somewhat slower than the growth rate recorded in the January-March period, but still robust. The UK economy flatlined in June compared with the previous month, as expected.

A decent growth rate and ebbing price pressures are a big relief for Bank of England (BoE) policymakers, who were worried that maintaining higher interest rates for a longer period due to stubborn inflation could escalate the burden on households and the broad economy.

On Wednesday, the Consumer Price Index (CPI) report for July showed that the core CPI – which excludes volatile items such as food, energy, alcohol and tobacco – decelerated at a faster-than-expected pace to 3.3% from the estimates of 3.4% and June’s figure of 3.5%. This decline in the core inflation was driven a sharp drop in price pressures in the service sector as wage growth slowed.

This fall in inflation has prompted expectations of a sequential interest-rate cut by the BoE in September. Markets priced in a 44% chance of a quarter-point BoE rate cut, up from the 36% registered before the data was released, Reuters reported.

Apart from the monthly and Q2 GDP, the ONS has also reported factory data for June. The report showed that monthly Industrial and Manufacturing Production grew at a robust pace of 1.1% and 0.8%, respectively, while investors forecasted only marginal growth. On year, Industrial and Manufacturing Production contracted at a slower pace of 1.4% and 1.5%, respectively.

Daily digest market movers: Pound Sterling outperforms major peers

• The Pound Sterling strengthens against the US Dollar (USD) in Thursday’s European trading hours. The GBP/USD pair capitalizes on US Dollar’s subdued performance as Federal Reserve (Fed) interest-rate cuts in September take center stage after the United States (US) CPI report for July showed that price pressures are on track to return to the desired rate of 2%.
• The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, pulls back slightly after posting a fresh weekly low at 102.20. The CPI report on Wednesday showed that inflationary pressures grew moderately, as expected. This has boosted confidence that the Fed will deliver a dovish decision and go for its first interest-rate cut in more than four years. However, traders remain split over the size at which borrowing rates will be reduced.
• The confidence over the Fed reducing interest rates in September was further boosted by dovish interest rate guidance from Atlanta Fed Bank President Raphael Bostic after the release of the inflation data. Bostic told in an interview with the Financial Times (FT) that he is comfortable with rate cuts in September. When asked about the rate-cut size, Bostic said that he is open for half a point if the labor market deteriorates further.
• In Thursday’s session, investors will focus on the US monthly Retail Sales data for July, which will be published at 12:30 GMT. Economists have estimated that sales at retail stores rose by 0.3% after remaining flat in June. The Retail Sales data, a key measure of consumer spending, will be keenly watched by investors as it will provide fresh cues on the inflation outlook and the state of the US economy.

Technical Analysis: Pound Sterling aims to revisit a two-week high of 1.2870

The Pound Sterling moves higher to recapture a two-week high of 1.2870 against the US Dollar. The near-term appeal of the GBP/USD pair is still firm as it holds the 20-day Exponential Moving Average (EMA), which trades around 1.2800.

Earlier, the Cable showed a sharp recovery from a six-week low of 1.2665 after a positive divergence formation on a daily time frame, in which the pair continues to post higher lows while the momentum oscillator makes lower lows. This generally results in a resumption of the uptrend, but it should be confirmed with more indicators.

The 14-day Relative Strength Index (RSI) recovers after finding a cushion near 40.00, exhibiting signs of buying interest at lower levels.

On the upside, the round-level resistance of 1.2900 and the psychological figure of 1.3000 will act as major resistances for the Pound Sterling. Alternatively, the recovery move could falter if the asset breaks below the August 8 low at 1.2665. This would expose the asset to the June 27 low at 1.2613, followed by the April 29 high at 1.2570.