Sterling hits two-year high as Fed rate cut bets weigh on dollar

• Sterling buyers were unstoppable against the US dollar amid a Fed-BoE policy divergence.
• GBP/USD eyes more gains as top US economic data will dominate next week.
• Sterling flirts with overbought territory on daily RSI, what next?

The British pound (GBP) posted a second straight weekly gain against the US dollar (USD) as the GBP/USD pair hit its highest level since March 2022 above 1.3200.

Sterling rises as US dollar withers

GBP/USD saw another successful week, devoid of high-impact economic events from the United Kingdom (UK). The underlying positive tone around the major was mainly driven by the sustained weakness of the US dollar against its main rivals.

Traders continued to keep their outlook bearish on the greenback as modest expectations of the US Federal Reserve (Fed) rose during the week of the Jackson Hole Symposium. USD buyers remained on the back foot in the run-up to the Fed’s July meeting minutes and Chairman Jerome Powell’s speech later in the week.

Despite a risk-averse market environment, the US dollar failed to find safe-haven demand amid jitters ahead of Powell’s appearance. The greenback took another hit after Wednesday’s release of minutes from the Fed.

Most policymakers felt that “if the data continues to emerge as expected, it would probably be appropriate to ease the policy at the next meeting,” the Minutes said. Moreover, the minutes mention that other decision-makers were even willing to reduce the cost of borrowing in the July meeting itself.

The benchmark revision of non-farm payrolls further cemented a Fed rate cut for September. The US Labor Department said the NFP for April 2023 to March 2024 was cut by 818,000. The revision represented a total downward change of about 0.5%.

S&P Global’s weak US preliminary Manufacturing Purchasing Managers’ Index (PMI) and jobless claims data on Thursday strengthened bets for a tight policy as early as September.

Markets had a 27% chance of a 50 basis point (bps) cut at the Fed’s Sept. 17-18 meeting and a 73% chance of a 25 basis point cut, according to CME Group’s FedWatch tool.

As traders move away from US dollar longs, GBP/USD hit a new 13-month high of 1.3130, also helped by strong preliminary UK S&P Global business PMIs. UK manufacturing PMI improved from 52.1 in July to 52.5 in August. Markets were expecting a 52.1 print. Meanwhile, Britain’s preliminary index of services activity rose to 53.3 in August, compared with July’s 52.5 and the expected figure of 52.8.

The Fed-BoE monetary policy divergence remained in play and acted as a tailwind for the pound, while the US dollar sat on thin ice awaiting Powell’s words.

Powell noted that the time had come for monetary policy to adjust and said he did not welcome further cooling in labor market conditions. “We will do everything we can to support a strong labor market as we make progress toward price stability,” he added. The USD came under renewed selling pressure with the immediate reaction allowing GBP/USD to climb above 1.3200 for the first time since March 2022.

Next week: US growth and inflation data

Following volatility from the week of the Jackson Hole Symposium, sterling traders are catching their breath amid a short holiday week.

UK markets were closed on Monday for the summer holiday. Later in the day, the US economic calendar will present Durable Goods Orders, but the data is unlikely to have a significant impact on the value of the US dollar and the GBP/USD pair.

The main highlight of the week is expected to be the second estimate of the US Gross Domestic Product (GDP) report and the main price index for personal consumption expenditures (PCE), the Fed’s preferred measure of inflation.

In the first half of the week, sales data from the UK CBI and consumer confidence data from the US Conference Board will provide some trade stimulus.

Sentiment around central bank policy expectations, Fed official speeches and geopolitical risks in the Middle East will continue to drive GBP/USD price action.

GBP/USD: Technical Outlook

GBP/USD’s recovery from five-week lows of 1.2665 rallied strongly last week as buyers stormed past the year-to-date (YTD) high at 1.3045 to hit a 29-month high above 1.3200.

In doing so, the pound went further beyond all key daily simple moving averages (SMAs). The 14-day Relative Strength Index (RSI) has entered overbought territory, currently near 75.

With overbought conditions, GBP traders could see a brief correction, with every pullback likely to be bought as long as the leading indicator holds above the 50 level.

GBP/USD could encounter intermediate resistance at 1.3250 before buyers target the round 1.3300 level.

On a corrective downside, the previous YTD high at 1.3045 will be the initial point of contention, below which the key 1.3000 level will be tested.

If selling momentum intensifies, the 1.2900 level will be threatened, followed by the confluence zone around 1.2850. At this level, the 50-day SMA and 21-day SMA sit.