Sterling rebounds as chances of big Fed rate cut rise

• Sterling made a late bounce back against the US dollar, testing 1.3000.
• GBP/USD awaits further directional impetus from UK CPI data and Fed and BoE decisions.
• Sterling buyers are fighting for control above the 21-day SMA, while the daily RSI is turning bullish.

The British pound (GBP) blocked its correction from over two-year highs against the US dollar (USD) and made an impressive comeback, with the GBP/USD pair testing the critical 1.3000 level.

Sterling – A tale of two halves

GBP/USD saw good two-way price action, correcting sharply to a three-week low of 1.3002 in the first half of the week only to recoup weekly losses in the second half. The sentiment around the pair was mainly determined by the dynamics of the US dollar. The greenback continued to remain at the mercy of market expectations regarding the size of the interest rate cut by the US Federal Reserve (Fed) next week.

August US labor market data fueled a late rally in the USD against its main rivals last week, which extended into this week and weighed heavily on the GBP/USD pair. US nonfarm payrolls rose 142,000, missing an expected gain of 160,000. On the other hand, the Unemployment Rate fell to 4.2%, in line with expectations.

Disappointing US employment data rekindled concerns about a possible economic downturn and lifted the haven demand for the greenback. Markets continued to look for cash hedging as they braced for critical US inflation data on Wednesday. Data released by the US Bureau of Labor Statistics (BLS) showed on Wednesday that the CPI rose 0.2% on a monthly basis in August, in line with the expected print of 0.2%. Core CPI for August in the US rose 0.3% on the month compared to estimates of 0.2%. Underlying inflation numbers have led markets to rule out an excessive Fed rate cut this month.

Sterling also felt the heat from weaker UK wages growth and Gross Domestic Product (GDP) data released on Tuesday and Wednesday respectively. Average earnings, excluding bonuses, in the UK rose 5.1% to 3 million in July, compared to a 5.4% increase seen in June. The UK economy saw no growth in July after stagnating in June, data from the Office for National Statistics (ONS) showed on Wednesday, missing the expected 0.2% rise.

These fundamentals took GBP/USD to a three-week low above the 1.3000 level. However, buyers were able to defend this key level as the US dollar saw a fresh wave of selling on dismal US Producer Price Index (PPI) data and claims, which strengthened bets on a rate cut by 50 basis points (bps) by the Fed. at the September 18 political announcement.

Annually, headline PPI rose 1.7% in August, compared with the print market consensus of 1.8%. Core PPI rose 2.4% YoY in the same period, below the estimate of 2.5%. Meanwhile, initial jobless claims were 230,000 for the week ended September 7, up 2,000 from the previous period, while in line with the forecast. Dismal US data combined with the Wall Street Journal (WSJ) article on the Fed’s rate cut dilemma brought back bets for a jumbo cut at the September meeting, crushing the greenback while supporting GBP/USD back above 1.3100 .

Markets are now pricing in a 43 percent chance the Fed will cut rates by 50 bps, up from 27 percent a day earlier, with a 57 percent chance of a 25 bps cut, CME Group’s FedWatch tool showed. Rising dovish Fed expectations exacerbated the US dollar’s pain on Friday. The latest US data release showed before the weekend that consumer confidence improved slightly in early September, with the University of Michigan’s preliminary index of consumer sentiment rising to 69 from 67.9 in August. This reading beat market expectations of 68, but failed to help the USD stage a rally.

Next week: All eyes on UK CPI data, Fed and BoE verdicts

All eyes now turn to the high-impact UK CPI inflation report and the all-important Fed and BoE announcements, which will determine the next directional move in the GBP/USD pair.

It’s a quiet start to the week for major central banks, with no relevant data to be released on Monday. It will present US retail sales data on Tuesday, while the UK record remains dry.

Wednesday is a busy one, with UK inflation data due out ahead of the key Fed verdict and Chairman Jerome Powell’s press conference.

It’s not a “Super Thursday” because the BoE will announce its rate decision only without the update forecasts and without Governor Andrew Bailey’s press to follow. On the same day, the US calendar will see the weekly release of data on jobless claims, existing home sales and manufacturing from the Philly Fed.

On Friday, the UK will release retail sales data as traders watch a speech by BoE policy makers Cathrine Mann.

Fed policymakers will also return to the podium on Friday as the Fed’s “blackout period” draws to a close.

GBP/USD: Technical Outlook

As seen on the daily chart, GBP/USD defied bearish pressures and managed to break above key support at 1.3045 (July 17 high) after briefly testing offers at 1.3000.

On the way to the recovery, the pair retook the 21-day simple moving average (SMA) at 1.3119 on a daily closing basis, canceling the short-term bearish outlook.

Adding credence to the renewed rally, the 14-day Relative Strength Index (RSI) has regained the 50 level, currently near 58.00.

On the upside, GBP/USD needs to break the downtrend line resistance at 1.3218 before targeting the 29-month high of 1.3266.

Above, GBP buyers will find the next relevant resistance levels at the 1.3300 round and the 1.3350 psychological barrier.

If the buyers face rejection of the aforementioned trend barrier at 1.3218, a correction towards the July 17 high of 1.3045 could occur.

Failure to hold above this level could trigger another decline towards the 50-day SMA at 1.2964.

The next relevant cushion lines up at the March 8 high of 1.2894, a break below which the 100-day SMA support at 1.2819 will come into play.