Sterling rises ahead of Fed-BoE monetary policy week

• Sterling rises to near 1.3160 ​​against the US dollar on upbeat market sentiment.
• Investors expect the BoE to leave interest rates unchanged at 5% on Thursday.
• Traders remain divided on the size of the Fed’s likely rate cut.

The British pound (GBP) is a strong performer against its major peers at the start of the week, supported by improved attractiveness for perceived risk-on currencies and a weakening US dollar, which is pressured by growing prospects that the Federal Reserve (Fed) will for a big interest rate cut on Wednesday.

Farm Fed interest rate cut prospects hurt the US dollar ( USD ), the US dollar index ( DXY ), which tracks the greenback against six major currencies, hit a new weekly low near 100.80.

As for the United Kingdom (UK), sterling will be guided by consumer price index (CPI) data for August and the Bank of England’s (BoE) monetary policy decision, which are scheduled for Wednesday and Thursday.

Economists forecast that the UK’s annual core CPI – which excludes volatile components – rose at a faster pace of 3.5% from 3.3% in July, with headline inflation rising steadily at 2.2%. Investors will also focus on data on UK services inflation, a gauge closely watched by BoE officials that remained elevated.

Inflation data will significantly influence market speculation for the BoE’s interest rate policy. Financial market participants currently expect the BoE to leave interest rates unchanged at 5% and expect only one further rate cut in the rest of the year.

Daily Market Reasons: Sterling Beats Majors

• The British pound is reaching near 1.3160 ​​against the US dollar in the London session on Monday. GBP/USD is gaining as investors expect the BoE’s policy easing cycle to be less aggressive than the Fed’s.
• The Fed is almost certain to start cutting interest rates on Wednesday. However, traders remain divided on whether the size of the rate cut will be 25 or 50 basis points (bps). According to the CME FedWatch tool, the likelihood that the Fed will cut interest rates by 50 bps to 4.75%-5.00% in September has risen sharply to 61% from 30% a week ago.
• Market speculation for a huge interest rate cut by the Fed strengthened after the release of the Producer Price Index (PPI) report for August, which showed that core producer inflation slowed at a faster-than-expected pace to to 1.7%. Some media reports have also added to expectations that the Fed may opt for a big cut.
• Ahead of the Fed’s policy announcement, investors will focus on United States (US) retail sales data for August due out on Tuesday. Data on retail sales, a key measure of consumer spending, is expected to have risen 0.2 percent, slower than the 1.0 percent increase seen in July.

Technical Analysis: Sterling rises to near 1.3160

The British pound is gaining near 1.3160 ​​against the US dollar. The GBP/USD pair is extending its recovery after a corrective move close to the trend line drawn from the 28 December 2023 high of 1.2828, from where it made a sharp rally after a breakout on 21 August. Also, the 20-day Exponential Moving Average (EMA) near 1.3080 acted as a major support for the pound sterling.

The 14-day Relative Strength Index (RSI) reaches 60.00. Another round of bullish momentum could occur if the oscillator breaks above this 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. On the downside, the psychological level of 1.3000 appears as crucial support.