Sterling reaches near 1.3150 as Fed high rate bets increase

• Sterling climbs to near 1.3150 against the US dollar as traders raise bets on a 50 bps Fed rate cut at next week’s meeting.
• The slowdown in the US annual PPI for August has driven the outlook for a sizeable Fed rate cut.
• Investors expect the BoE is unlikely to cut interest rates next week.

The British pound (GBP) is extending its recovery to near 1.3150 against the US dollar (USD) in the London session on Friday. GBP/USD gains as the US dollar (USD) falls sharply after August US (US) Producer Price Index (PPI) data fueled market expectations for the Federal Reserve (Fed) to start cutting rates aggressively interest rates next week.

The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, is sliding further to near 101.00.

The PPI report showed annual core producer inflation rose 1.7 percent, slower than estimates of 1.8 percent and July’s print of 2.1 percent. Over the same period, the core PPI – which excludes volatile food and energy prices – rose steadily by 2.4%. Investors had expected the core PPI to have accelerated to 2.5%. Meanwhile, the monthly headline and core PPI rose at a faster pace of 0.2% and 0.3% respectively.

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 rose sharply to 43% from 14% before the release of US PPI data .

In Friday’s session, investors will focus on preliminary Michigan consumer sentiment data for September. Sentiment data is estimated to have remained almost flat at 68.0 from the previous release of 67.9.

Daily Market Reasons: British Pound Surpasses US Dollar

• Sterling puts in a strong performance against its major peers on Friday. The British currency is strengthening on several tailwinds. Growing speculation that the Fed will cut interest rates aggressively boosted market sentiment. In addition, firm expectations that the Bank of England (BoE) will pursue a shallow policy easing cycle also strengthened the pound sterling.
• Historically, the scenario of the Fed pivoting towards policy normalization aggressively improves the attractiveness of risky assets. S&P 500 futures posted nominal gains in the Asian session after an upbeat Thursday, suggesting an improvement in investors’ risk appetite.
• According to a Reuters poll, the BoE is unlikely to cut interest rates at its next policy meeting, scheduled for next week. All 65 economists in a Reuters poll said the BoE was likely to keep interest rates at 5.0 percent on Thursday, after a cut from a 16-year high of 5.25 percent in August.
• Meanwhile, the next major trigger for the pound will be the United Kingdom (UK) consumer price index (CPI) data for August, due out on Wednesday. The BoE’s latest forecasts showed annual UK inflation to remain above 2% until the end of the year.

Technical Analysis: Sterling bounces back from 1.3000

Sterling recovers sharply to near 1.3150 against the US dollar. GBP/USD bounced back strongly after finding strong buying interest near the trend line drawn from the 28 December 2023 high of 1.2828, from where it saw a sharp move higher after a breakout on 21 August. Also, the 20-day exponential moving average (EMA) near 1.3080 acted as a major support for the sterling call.

The 14-day Relative Strength Index (RSI) remains in the 40.00-60.00 range. A new bullish push would occur if the momentum oscillator breaks above 60.00.

Looking to the upside, the cable will face resistance near the round level resistance of 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.