Sterling seizes 1.3200 ahead of UK inflation and Fed-BoE policy meetings

• Sterling holds gains near 1.3200 against the US dollar as bets back the Fed to opt for a big interest rate hike.
• Investors expect the BoE to leave interest rates unchanged at 5% on Thursday.
• UK core CPI is estimated to have risen to 3.5% in August.

The British pound (GBP) is lower against the US dollar (USD) but is clinging to gains near support at the 1.3200 round level in the London session on Tuesday. The outlook for GBP/USD remains firm as the US dollar remains under pressure ahead of the Federal Reserve’s (Fed) monetary policy decision on Wednesday.

The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, is nearing a year-to-date (YTD) low near 100.50 amid firm speculation that the Fed will begin its easing cycle policies aggressively.

The Fed is expected to cut interest rates for the first time in more than four years. The Fed has maintained a tight stance on monetary policy amid a fierce battle against stubborn inflation, which has been driven by pandemic stimulus.

Market expectations for the Fed to begin cutting interest rates by a wide margin rose overnight after dovish comments from Jon Faust, a former senior adviser to Fed Chairman Jerome Powell, in comments to the Wall Street Journal (WSJ). Faust said his preference “would be easy to start with 50 (basis point interest rate cut)” because he believed more policymakers would forecast a 100bp rate cut by the end of the year. “If that’s the case, starting with a 25 basis point cut risks raising uncomfortable questions about why officials expected to deliver a bigger rate cut later this year but didn’t lead with it.” , he said.

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 rose sharply to 69% from 34% a week ago.

In Tuesday’s session, investors will focus on monthly US retail sales data for August, which will be released at 12:30 GMT. The Census Bureau is expected to report that retail sales, a key measure of consumer spending, rose 0.2 percent, slower than the 1 percent increase seen in July.

Daily Market Reasons: Sterling to be influenced by UK August inflation data

• Sterling eases slightly against its major peers on Tuesday. The British currency appears to be moving cautiously as investors await the United Kingdom (UK) consumer price index (CPI) data for August due out on Wednesday. Inflation data will significantly influence market speculation for the Bank of England’s (BoE) interest rate path for the final quarter of the year, as it is expected to leave interest rates unchanged on Thursday.
• The UK CPI report is expected to show that annual core inflation – which excludes volatile components such as food, energy, alcohol and tobacco – rose at a faster pace to 3.5% from 3.3% in July , with headline inflation steady at 2.2%. Any sign that UK inflation remains persistent would lead to the BoE stressing the need to keep interest rates at their current levels at the policy meeting in November. On the contrary, weak inflation numbers would allow the BoE to provide accommodative guidance. Financial market participants currently expect the BoE to cut interest rates once more, either in November or December.
• In the UK CPI report, investors will focus closely on services inflation data, which is closely watched by BoE officials. In July, annual services inflation fell sharply to 5.2%, the lowest figure in two years.

Technical analysis: Sterling makes gains near 1.3200

Sterling holds gains near 1.3200 against the US dollar in European trading hours. The short-term outlook for GBP/USD remains firm as it holds above the 20-day exponential moving average (EMA) near 1.3100. Earlier, the cable consolidated after recovering from a corrective move to near the trend line drawn from December 28, 2023 high of 1.2828, from where it made a sharp rally after a breakout on August 21.

The 14-day Relative Strength Index (RSI) is above 60.00. Another round of bullish momentum could occur if the oscillator holds around this level.

Looking to the upside, cable will face resistance near the August 27 high of 1.3266 and the psychological level of 1.3500. On the downside, the psychological level of 1.3000 appears as crucial support.