Sterling is correcting slightly as US core PCE inflation is in the spotlight

• Sterling slips to near 1.3230 against the US dollar as the latter gains temporary ground.
• Economists expect annual core PCE inflation to accelerate to 2.7%.
• For fresh clues on the BoE’s interest rate path, investors await Catherine Mann’s speech at 12:15 GMT.

The British pound (GBP) is easing from a more than two-year high of 1.3266 against the US dollar (USD) in the London session on Wednesday. GBP/USD is lower as the US dollar recovers some ground as investors focus on core data on the United States (US) personal consumption expenditure (PCE) price index for July due out on Friday as it would could be the next big thing. triggers for the pair.

The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, is seeing some buying interest as value buying has begun after announcing a new year-to-date (YTD) low of 100.50.

Despite the recent recovery, the short-term outlook for the US dollar is still weak as investors are confident that the Federal Reserve (Fed) will cut interest rates at its September meeting. Traders are now debating whether the Fed will offer a sizeable interest rate cut or stick to a small cut in borrowing costs.

According to CME’s FedWatch tool, 30-day Federal Funds Futures price data show the probability of a 50 basis point (bps) rate cut in September is 34.5%, while the rest favor a 25 cut bps.

As for core PCE inflation, economists expect the Fed’s preferred inflation gauge to rise at a faster pace to 2.7% year-over-year from 2.6% in June, with the figures monthly steadily increasing by 0.2%. Signs that inflation remains persistent would temper market speculation for a big rate cut by the Fed, while further easing of price pressures would boost them.

Daily market reasons: Sterling to be guided by BoE Mann speech

• The pound is showing a mixed performance against its major peers in European trading hours on Wednesday. The British currency is expected to trade sideways as investors look for fresh clues about the Bank of England’s (BoE) interest rate path.
• The BoE cut interest rates by 25 basis points (bps) to 5% in August, ending two-and-a-half years of tight monetary policy as officials gained confidence that price pressures would return to the bank’s target of 2.% sustainably.
• Market participants expect the BoE’s rate cut trajectory for the rest of this year to be slower than that of other central banks as the United Kingdom (UK) economy appears to be holding up well, according to the S&P Global/CIPS PMI flash for August and robust growth in Gross Domestic Product (GDP) in Q2.
• For further guidance on interest rates, investors await BoE Governor Catherine Mann’s speech, which is scheduled for 12:15 GMT. Mann was among those policymakers who voted to keep interest rates at 5.25 percent at the August 1 monetary policy meeting. Investors would be looking for clues on how much the BoE will cut interest rates this year, along with the outlook for services inflation and wage pressures. .
• On the political front, comments by Prime Minister of the United Kingdom (UK) Keir Starmer on the outlook for the financial budget to be announced in October also improved the attractiveness of the pound sterling. Starmer said the fiscal budget is expected to be tight, specifically that “the budget will be short-term pain for long-term gain,” with the intention of increasing the tax burden on households, especially higher earners.

Technical Analysis: Sterling holds key support at 1.3200

Sterling is correcting slightly after hitting a fresh two-and-a-half-year high of 1.3266 against the US dollar. The short-term appeal of the GBP/USD pair remains firm as it maintains the breakout of the Rising Channel chart formation on the weekly time frame. If the bullish momentum resumes, the cable is expected to extend its rally towards the February 4, 2022 high of 1.3640.

The upward-sloping 20-week exponential moving average (EMA) near 1.3000 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.