- The Pound Sterling climbs to around 1.3160 against the US Dollar, driven by positive market sentiment.
- Investors anticipate the BoE will maintain interest rates at 5% in Thursday's meeting.
- Traders are split on the expected magnitude of the Fed's potential interest rate cut.
The Pound Sterling (GBP) is performing strongly against its major counterparts at the start of the week, bolstered by increased demand for risk-sensitive currencies and a weakening US Dollar. The Dollar is under pressure due to rising expectations that the Federal Reserve (Fed) will implement a significant interest rate cut on Wednesday.
Anticipation of a large Fed rate cut has weighed on the US Dollar (USD), with the US Dollar Index (DXY), which measures the Greenback against six major currencies, hitting a new weekly low near 100.80.
In the United Kingdom (UK), the Pound Sterling's movement will be influenced by August's Consumer Price Index (CPI) data and the Bank of England’s (BoE) monetary policy decision, set for Wednesday and Thursday, respectively.
Economists predict that the UK's annual core CPI – excluding volatile components – will accelerate to 3.5% from 3.3% in July, while headline inflation is expected to rise by 2.2%. Additionally, investors will closely watch UK service inflation, a key indicator for BoE officials that has remained elevated.
This inflation data will play a crucial role in shaping market expectations for BoE policy decisions. Currently, financial markets are projecting that the BoE will keep interest rates steady at 5%, with only one more rate cut anticipated before the end of the year.
Daily Market Movers: Pound Sterling Outperforms Major Peers
- The Pound Sterling surged to near 1.3160 against the US Dollar during Monday’s London session. The GBP/USD pair advanced as investors expect the Bank of England’s (BoE) policy-easing cycle to be less aggressive compared to that of the Federal Reserve (Fed).
- The Fed is widely expected to start cutting interest rates on Wednesday, but traders remain divided on whether the reduction will be 25 or 50 basis points (bps). According to the CME FedWatch tool, the probability of a 50 bps rate cut to 4.75%-5.00% in September has jumped to 61%, up from 30% a week ago.
- Expectations for a larger Fed rate cut have been bolstered by the August Producer Price Index (PPI) report, which showed a sharper-than-expected deceleration in headline producer inflation to 1.7%. Media reports have also fueled speculation that the Fed may opt for a more significant reduction.
- Ahead of the Fed's policy announcement, investors will closely watch the United States (US) Retail Sales data for August, set to be released on Tuesday. Retail Sales, a key indicator of consumer spending, is projected to have grown by 0.2%, a slowdown from the 1.0% increase seen in July.
Technical Analysis: Pound Sterling Advances to Near 1.3160
The Pound Sterling climbs to near 1.3160 against the US Dollar, extending its recovery following a pullback to the trendline drawn from the December 28, 2023, high of 1.2828. After breaking out on August 21, the pair experienced a sharp increase, with the 20-day Exponential Moving Average (EMA) near 1.3080 providing strong support for the Pound.
The 14-day Relative Strength Index (RSI) has reached 60.00, signaling that a fresh wave of bullish momentum could emerge if the RSI breaks above this level.
On the upside, the GBP/USD pair is expected to face resistance near the key round-level of 1.3200 and the psychological barrier of 1.3500. On the downside, the psychological level of 1.3000 serves as critical support.
