Sterling slips further as Fed’s high rate bets taper

• The pound is underperforming the US dollar as market expectations for the Fed opting for a big interest rate cut have eased.
• U.S. employment growth was weaker than expected in August, while the unemployment rate fell.
• This week, investors will focus mainly on UK employment data and US inflation

The British pound (GBP) is struggling to hold the key 1.3100 support against the US dollar (USD) in the London session on Monday. GBP/USD is facing selling pressure as the US Dollar (USD) extends its recovery, with the US Dollar Index (DXY) rising to near 101.40. The greenback is gaining ground as market bets that the Federal Reserve (Fed) will start its policy easing process aggressively eased after Friday’s United States (US) Nonfarm Payrolls (NFP) data.

According to the CME FedWatch tool, the likelihood that the Fed will cut interest rates by 50 basis points (bps) to 4.75%-5.00% in September fell to 27% from 41% before the August data release .

The NFP report showed job growth cooling broadly compared to readings seen over the past two years, the unemployment rate falling as expected and wage growth accelerating. Even though there is growing evidence that the labor market is bending, the latest data is strong enough to protect the US economy from entering a recession. The assessment that the labor market is holding out is weighing on market expectations of a big Fed rate cut, lifting the US dollar.

For fresh clues on the interest rate outlook, investors will be keeping a close eye on US consumer price index (CPI) data for August due out on Wednesday. The inflation report is expected to show that both the monthly CPI and the core CPI – which excludes food and energy prices – are expected to have risen steadily by 0.2%. Annual CPI is expected to have decelerated sharply to 2.6% from 2.9% in July.

Daily Market Reasons: Sterling Weakens Against US Dollar

• The pound is putting in a mixed performance against its major peers on Monday. The British currency is expected to trade sideways as investors focus on United Kingdom (UK) employment data for the quarter ending in July due on Tuesday.
• UK labor market data could influence market speculation for the Bank of England’s (BoE) interest rate path for the rest of the year. According to estimates, the unemployment rate is considered lower, down to 4.1% from the previous reading of 4.2%. Average earnings, including bonuses, are estimated to have shrunk to 4.1% from the previous release of 4.5%. Weak wage growth would raise expectations for more interest rate cuts by the BoE as it would imply a drop in service sector inflation.
• Meanwhile, a monthly jobs report by trade body and accountants KPMG of the Recruitment and Employment Confederation showed permanent jobs fell at the fastest pace in five months, Reuters reported. The agency also noted that wage growth offered for new hires hit a five-month low, one of the weakest readings since early 2021. “News that while wages rose last month, it was at the weaker pace since March, could help make the case for more rate cuts when the Monetary Policy Committee meets to decide the future path for interest rates,” said Jon Holt, KPMG’s UK chief executive and partner main.

Technical analysis: Sterling falls to near 1.3100

Sterling extends its downside close to the crucial 1.3100 support against the US dollar. GBP/USD is expected to find intermediate support near the 20-day exponential moving average (EMA), which is trading around 1.3075. Also, the uptrend line from 28 December 2023 high of 1.2828 will act as key support for the GBP bulls.

The 14-day Relative Strength Index (RSI) is falling in the 40.00-60.00 range, suggesting that the bullish momentum is over for now. However, the bullish trend remains intact as the indicator remains above the neutral 50 level.

Looking to the upside, the cable will face resistance near the round-level resistance of 1.3200 and the psychological level of 1.3500.