The Pound Sterling (GBP) has shown a strong performance against the US Dollar (USD) in the early part of Monday’s New York session, with the GBP increasing amidst uncertainty regarding when the Bank of England (BoE) will start reducing interest rates. Headline inflation in the United Kingdom (UK) has reached the desired rate of 2%, but BoE policymakers are still focused on price pressures in the service sector as an indicator for rate cuts. There is an expectation in financial markets that the BoE will begin reducing interest rates starting from the August meeting.
With the ongoing uncertainty surrounding the UK elections scheduled for July 4, the Pound Sterling is expected to exhibit fluctuations in the coming days. According to exit polls, the opposition Labor Party is anticipated to win against the Conservative Party led by UK Prime Minister Rishi Sunak. The outcome of the elections will play a crucial role in shaping the future direction of the GBP.
Continuing its upward trend, the GBP/USD pair reached 1.2680 as the US Dollar weakened following a decrease in price pressures indicated by the US Personal Consumption Expenditures Price Index (PCE) report for May. The drop in US inflation has fueled expectations of rate cuts by the Federal Reserve (Fed). The CME FedWatch tool shows a 63.4% probability of rate cuts in September, with expectations of two rate cuts this year.
Fed officials have maintained a stance of keeping interest rates constant until clear evidence is seen of inflation decreasing towards the desired rate of 2%. Atlanta Fed Bank President Raphael Bostic indicated that rate cuts may become appropriate in the fourth quarter of the year. This week, the US Dollar is expected to experience volatility with the release of the ISM Manufacturing PMI and employment data for June, with the Manufacturing PMI report expected to show modest improvements.
The technical analysis shows the Pound Sterling facing resistance near 1.2700 against the US Dollar, with the GBP/USD pair having difficulty maintaining levels above the 61.8% Fibonacci retracement support. The 50-day Exponential Moving Average (EMA) near 1.2640 indicates uncertainty in the near-term outlook, while the Relative Strength Index (RSI) oscillates within a range indicating indecision among market participants.
The Federal Reserve (Fed) plays a crucial role in shaping monetary policy in the US, with its primary tools being interest rate adjustments to achieve price stability and foster full employment. The Fed holds eight policy meetings a year where it assesses economic conditions and makes policy decisions, with a focus on maintaining inflation close to its 2% target. In extreme situations, the Fed may resort to Quantitative Easing (QE) to increase credit flow in a financial crisis, which weakens the US Dollar. Conversely, Quantitative Tightening (QT) involves the Fed reducing bond purchases and is positive for the USD’s value.
