- The Pound Sterling hits a weekly high of 1.3150 against the US Dollar as traders increase their bets on a 50 basis point rate cut by the Fed.
- The weaker-than-expected US annual PPI for August has bolstered expectations of a significant Fed rate cut.
- Investors anticipate that the Bank of England is unlikely to reduce interest rates in the upcoming week.
The Pound Sterling (GBP) rises to nearly 1.3150 against the US Dollar (USD) during Friday's North American session. The GBP/USD pair remains strong as the USD declines sharply following the August Producer Price Index (PPI) data, which has heightened expectations for an aggressive interest rate cut by the Federal Reserve (Fed) next week.
The US Dollar Index (DXY), which measures the Greenback’s value against six major currencies, slides further to around 101.00.
The PPI report revealed that annual headline producer inflation increased by 1.7%, falling short of the 1.8% estimate and July’s 2.1%. The core PPI, excluding food and energy, grew at a steady 2.4%, below the expected 2.5%. On a monthly basis, both headline and core PPI rose by 0.2% and 0.3%, respectively.
According to the CME FedWatch tool, the likelihood of the Fed cutting interest rates by 50 basis points (bps) to 4.75%-5.00% in September has surged to 43% from just 14% before the PPI data release.
Additionally, preliminary Michigan Consumer Sentiment Index data for September exceeded forecasts, improving to 69.0, above the expected 68.0.
Daily Digest: Pound Sterling Outperforms US Dollar
- The Pound Sterling shows strong performance against major peers on Friday, buoyed by multiple factors. Speculation that the Federal Reserve might implement an aggressive rate cut has bolstered market sentiment, while expectations that the Bank of England (BoE) will adopt a more modest easing cycle have also supported the Pound.
- Historically, a shift towards aggressive policy normalization by the Fed tends to enhance the appeal of risk assets. This is evident as S&P 500 futures post modest gains in the Asian session, following a bullish Thursday, indicating improved investor risk appetite.
- According to a Reuters poll, the BoE is expected to keep interest rates unchanged at 5.0% in its upcoming policy meeting next week. All 65 economists surveyed anticipate that the BoE will maintain rates after reducing them from a 16-year high of 5.25% in August.
- Looking ahead, the next significant event for the Pound Sterling will be the release of the UK Consumer Price Index (CPI) data for August, scheduled for Wednesday. The latest BoE forecast predicts that one-year forward UK annual headline inflation will hold steady at 2.7%.
Technical Analysis: Pound Sterling Recovers Above 20-Day EMA
The Pound Sterling has made a sharp recovery to nearly 1.3150 against the US Dollar. The GBP/USD pair rebounded strongly after finding significant buying interest near the trendline drawn from the December 28, 2023 high of 1.2828, which led to a notable upside move following a breakout on August 21. Additionally, the 20-day Exponential Moving Average (EMA) around 1.3080 has provided substantial support for the Pound Sterling’s momentum.
The 14-day Relative Strength Index (RSI) remains within the 40.00-60.00 range. A new bullish signal may emerge if the RSI surpasses 60.00.
Looking ahead, resistance for the GBP/USD is expected near the round-number level of 1.3200 and the psychological level of 1.3500. On the downside, the 1.3000 level is a key support level for the Pound Sterling bulls.
