Sterling faces a downside as bets on a Fed rate cut increase

• Sterling is slightly higher against the US dollar, but a decline in bets that the Fed will opt for a big rate cut keeps the downtrend afloat.
• Investors see the BoE leaving interest rates unchanged at 5% at its September meeting.
• Market participants await the US PPI report for August.

The British pound (GBP) is holding late Wednesday’s recovery move from the 1.3000 psychological support to near 1.3050 against the US dollar (USD) in the Thursday session in London. However, the outlook for the GBP/USD pair is tilted to the downside as the US dollar clings to gains near a new weekly high as investors gain confidence that the Federal Reserve (Fed) will begin the policy easing process with a 25- interest rate reduction in basis points.

The US Dollar Index (DXY), which tracks the greenback against six major currencies, holds gains near 101.70. Investors have been speculating for weeks about the size of the Fed’s next rate cut. Expectations for a small interest rate cut of 25 basis points strengthened after consumer price index (CPI) data for August released on Wednesday showed signs of some easing of inflationary pressures.

Headline annual inflation was lower than anticipated. However, data on core inflation – which excludes volatile food and energy prices – remained uncertain. Core inflation rose 3.2% in line with expectations, but the monthly figure rose 0.3%, faster than the anticipated 0.2%.

The lingering US core inflation data has significantly dented market expectations for sizeable Fed rate cuts. According to the CME FedWatch tool, the probability that the Fed will cut interest rates by 50 basis points (bps) to 4.75%-5.00% in September fell to 13% from 40% a week ago.

In Thursday’s session, investors await United States (US) producer price index (PPI) data for August and initial jobless claims for the week ending September 6. Both reports will be published at 12:30 GMT.

Headline data on producer inflation is expected to have slowed further due to lower energy prices, while core numbers are expected to have accelerated.

Daily Market Reasons: Sterling Wobbles Against US Dollar

• Sterling rose in European trading hours on Thursday against its major peers, excluding Asia-Pacific currencies. The British currency is rising as market participants appear confident that the Bank of England’s (BoE) policy easing cycle will be less aggressive than that of other central banks.
• According to a Reuters poll, the BoE is expected to leave interest rates unchanged at 5% next week, but is expected to cut them again in November, despite inflation remaining above the bank’s 2% target. BoE Governor Andrew Bailey’s comments at the Jackson Hole Symposium (JH) also indicated that the central bank will gradually cut interest rates to keep a lid on inflationary pressures.
• A rise in market expectations for the BoE holding interest rates steady this month appears to be the result of robust job growth and a drop in the unemployment rate. In the three months to July, the unemployment rate fell to 4.1%, while UK employers hired 265,000 new workers, significantly higher than the previous release of 24,000.
• Going forward, the next big triggers for the pound will be the United Kingdom (UK) consumer price index (CPI) data for August and the BoE interest rate decision, which are due next week.

Technical Analysis: Sterling rises slightly to near 1.3050

Sterling is higher against the US dollar to near 1.3050, recovering from 1.3000. However, the near-term outlook for the cable has turned gloomy as the pair’s price action is falling below the trend line drawn from the December 28, 2023 high of 1.2828 – from where it saw a sharp move up after an August 21 breakout . , a downward move below the 20-day exponential moving average (EMA) near 1.3070 weakened the attractiveness of the pound sterling.

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 long-term bullish trend remains intact.

Looking to the upside, the cable will face resistance near the round level at 1.3200 and the psychological level of 1.3500. On the downside, the psychological level of 1.3000 appears as crucial support for the GBP bulls.