Sterling holds on to gains as Fed Powell gives green light to rate cuts

• Sterling holds strong against the US dollar to near 1.3200, driven by Fed Powell’s dovish guidance on interest rates.
• Fed Powell’s comments suggested he remains concerned about downside risks to the US labor market.
• BoE Governor Andrew Bailey refrained from taking any path of interest rate cuts.

The British pound (GBP) is trading near a near two-and-a-half-year high near 1.3200 against the US dollar (USD) in the London session on Monday. GBP/USD aims to extend its seven-day winning streak as the US dollar weakens following the unambiguous announcement by Federal Reserve (Fed) Chairman Jerome Powell that the central bank will begin cutting interest rates in September .

The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, is nearing a new yearly (YTD) low of 100.53.

Speaking at the Jackson Hole (JH) Symposium on Friday, Fed Powell said: “The time has come for policy to adjust.” However, he refrained from committing to a predetermined rate cut path and preferred to remain data-driven, saying “the direction of travel is clear and the timing and pace of rate cuts will depend on the data coming in , the evolution of perspectives, and the balance of risks”.

Powell’s comments indicated that the central bank is now more concerned about deteriorating labor market conditions and is confident that price pressures will return to the desired 2 percent target. He commented that upside risks to inflation have receded and downside risks to the labor market have increased. “We will do everything we can to support a strong labor market as we make progress toward price stability,” Powell added.

This week, the main trigger for the US dollar will be the core United States (US) personal consumption expenditure (PCE) price index data for July, which will be released on Friday. On a month-over-month basis, PCE inflation is estimated to have risen steadily by 0.2%.

In Monday’s session, investors will focus on US durable goods orders data for July, which will be released at 12:30 GMT. New orders for durable goods, a key measure of core consumer inflation, are expected to have risen at a robust 4 percent pace after a sharp decline in June. Nothing will come from the pound as the United Kingdom (UK) is on a bank holiday.

Daily market reasons: Sterling capitalizes on optimism about gradual BoE policy easing

• The pound is performing strongly against its major peers, excluding Asia-Pacific currencies, earlier in the week. The British currency is gaining as the Bank of England (BoE) is reluctant to offer a pre-set rate cut path, given that victory over UK inflation is far from over.
• BoE Governor Andrew Bailey signaled in his speech at the JH Symposium on Friday that the second-round effects of inflationary pressures may be less than expected, but added that the central bank should not be in a rush for more interest rate cuts, Reuters reported. The BoE “would be careful not to cut interest rates too quickly or too much,” Bailey said.
• Andrew Bailey also ruled out the risks of a potential recession and assured that the UK’s steady disinflation is in line with the aim of achieving a soft landing for the economy.
• This week, the pound will be guided by market speculation for BoE interest rate cuts amid the absence of top UK economic data. Market participants currently expect the BoE to cut one more rate cut this year. The BoE opted for a cut on August 1, with a close 5-4 split among the members of the Monetary Policy Committee. However, a slew of upbeat economic data, including a stronger-than-expected S&P Global/CIPS PMI for August, dented expectations for another rate cut in September.

Technical analysis: Sterling hits fresh two-and-a-half-year high near 1.3200

Sterling softens slightly against the US dollar but remains near 1.3200 after providing a breakout of the Rising Channel chart formation on the weekly time frame. GBP/USD is hitting a new near two and a half year high and is expected to extend its rally towards the February 4, 2022 high of 1.3640.

The rising 20-week exponential moving average (EMA) near 1.2766 suggests a strong uptrend.

The 14-period Relative Strength Index (RSI) is hovering in the bullish range of 60.00-80.00, suggesting strong upside momentum. However, it reached overbought levels around 70.00, increasing the chances of a corrective pullback. On the downside, the psychological level of 1.3000 will be the crucial support for the GBP bulls.