Pound Sterling gains against US Dollar with US core PCE inflation in traders’ radar

• The Pound Sterling moves higher back above 1.3200 against the US Dollar following Wednesday’s pullback.
• Traders focus on US core PCE inflation data for July, which can influence market speculation about the Fed’s rate cut size.
• Investors see the BoE delivering one more interest rate cut this year.

The Pound Sterling (GBP) rebounds from the key support of 1.3200 against the US Dollar (USD) in Thursday’s European session. The GBP/USD pair rises as the US Dollar (USD) edges lower after bouncing back strongly on Wednesday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, faces pressure in an attempt to extend its recovery above the immediate resistance of 101.20.

The Greenback is expected to struggle to hold to its recent rebound as the Federal Reserve (Fed) is almost certain to begin reducing interest rates from the September meeting. While traders are split over whether the Fed will start the policy-easing spell with a 25 or a 50-basis-points (bps) cut, the rate reduction is fully priced in. 

Firm speculation for the Fed to start cutting interest rates from September is driven by Fed Chair Jerome Powell’s dovish commentary on interest rates at the Jackson Hole (JH) Symposium held last week. Powell said that  “the time has come for policy to adjust,” highlighting that the US central bank is now more worried about downside risks to the labor market as inflation looks on track to return to the desired rate of 2%.

Meanwhile, investors await the United States (US) Personal Consumption Expenditure Price Index (PCE) report for July, which will be published on Friday. The PCE report is expected to show that year-on-year core inflation rose at a faster pace of 2.7% from 2.6% in June, with monthly figures growing steadily by 0.2%. The inflation data could significantly influence market speculation for the Federal Reserve’s (Fed) September monetary policy decision.

In Thursday’s session the UK economic calendar is empty, but investors will focus on plenty of US data. One of the key points is the second estimate of the Q2 Gross Domestic Product (GDP) data, which will be published at 12:30 GMT. Economists expect that the data won’t be revised, confirming that the US economy expanded by 2.8% on an annualized basis. The GDP data is unlikely to impact the US Dollar significantly unless there is a significant revision. Apart from that, the weekly US Jobless Claims numbers are also due, which have the potential to move markets in case of a substantial increase.

Daily digest market movers: Pound Sterling outperforms its major peers

• The Pound Sterling performs strongly against its major peers, except Asia-Pacific currencies, in European trading hours. The British currency remains firm as the Bank of England (BoE) is expected to follow a gradual policy-easing cycle, given that the victory over the United Kingdom (UK) inflation isn’t certain.
• BoE Governor Andrew Bailey signaled in his speech at the JH Symposium on Friday that the second-round effects of inflationary pressures would be smaller than expected, but also said that the UK central bank should not rush for more interest rate cuts, Reuters reported. The BoE would "be careful not to cut interest rates too quickly or by too much," Bailey said.
• BoE officials have been reluctant to offer a preset rate-cut path as inflation in the service sector has remained higher due to wage pressures. Going forward, the Pound Sterling will be guided by market expectations for BoE rate cuts for the remainder of the year amid the absence of top-tier economic data this week. Markets expect the BoE to cut its borrowing rates one more time this year. 

Technical Analysis: Pound Sterling finds support near 1.3200

The Pound Sterling rebounds after a mild corrective move to near the round-level support of 1.3200.  against the US Dollar. The near-term appeal of the GBP/USD pair remains firm as it holds the breakout of the Rising Channel chart formation on the weekly time frame. If bullish momentum resumes, the Cable is expected to extend its upside towards the psychological resistance of 1.3500 and the February 4, 2022, high of 1.3640 after breaking above a fresh two-and-a-half-year high of 1.3266 against the US Dollar.

The upward-sloping 20-week Exponential Moving Average (EMA) near 1.3000 suggests a strong upside trend.

The 14-period Relative Strength Index (RSI) oscillates in the bullish range of 60.00-80.00, suggesting a strong upside momentum. Still, it has reached overbought levels at around 70.00, increasing the chances of a corrective pullback. On the downside, the psychological level of 1.3000 will be the crucial support for the Pound Sterling bulls.