The Pound Sterling has shown strength against major currencies, with investors expecting a gradual policy-easing cycle by the Bank of England compared to other central banks. Money market pricing data suggests that the BoE is expected to cut interest rates by 40 bps, while the ECB and Fed are expected to make larger cuts. This confidence in the BoE’s shallow easing cycle is due to the improved economic outlook in the UK, with the IMF raising the GDP target for the year. The new Labour government’s fiscal plans are also expected to boost economic activity.
In Friday’s London session, the GBP/USD pair found support near 1.3150 after a two-day sell-off, with the US Dollar showing a subdued performance ahead of the US core PCE inflation data release. Economists anticipate that the annual core PCE inflation will accelerate to 2.7% from 2.6% in June. The impact of this data is significant as it is the Fed’s preferred inflation gauge for determining interest rates. Market speculation for the Fed’s interest rate path this year is not expected to be heavily influenced unless there is a significant deviation from estimates.
Technical analysis shows that the Pound Sterling remains strong, holding above 1.3150 against the US Dollar. The GBP/USD pair is expected to rise towards the psychological resistance of 1.3500 and the February 4, 2022, high of 1.3640. The 20-week Exponential Moving Average suggests a strong upside trend, while the 14-period Relative Strength Index indicates a strong upside momentum, although it is close to overbought levels. The crucial support for Pound Sterling bulls is seen at the psychological level of 1.3000.
The Core Personal Consumption Expenditures (PCE), released monthly by the US Bureau of Economic Analysis, measures changes in the prices of goods and services purchased by consumers in the US. The YoY reading compares prices in the reference month to the same month a year earlier and is the Fed’s preferred gauge of inflation. A high reading is bullish for the US Dollar, while a low reading is bearish. The impact of the PCE inflation data on the US Dollar and market speculation for the Fed’s interest rate cuts will depend on whether the data deviates significantly from estimates.
Overall, the Pound Sterling is expected to continue its strong performance against major currencies, supported by the anticipation of a gradual policy-easing cycle by the Bank of England. The UK’s improved economic outlook and fiscal plans by the new Labour government are driving this confidence. In the face of a subdued US Dollar and anticipation of US core PCE inflation data, investors will closely monitor how the data may impact market speculation for the Fed’s interest rate path this year.
