Sterling retains strength as BoE interest rate decision approaches

• Sterling is nearing 1.3250 against the US dollar following a big interest rate cut by the Fed and expectations of further policy easing.
• Investors focus on the BoE policy meeting, with markets expecting the UK central bank to leave interest rates unchanged at 5%.
• Stubborn UK services inflation in August strengthened the case for the BoE to keep interest rates steady.

The British pound (GBP) is clawing back intraday losses following the Federal Reserve (Fed) policy announcement, climbing above 1.3200 against the US dollar (USD) in London on Thursday. The valuation of the British currency is expected to remain volatile ahead of the Bank of England’s (BoE) policy meeting at 11:00 GMT.

The BoE is expected to leave interest rates unchanged at 5% after opting for a cut in August as central bank officials remain concerned about a sustained return of inflation to the bank’s 2% target. Of the nine-member Monetary Policy Committee (MPC), external BoE member Swati Dhingra and Deputy Governor Dave Ramsden will vote to cut interest rates for the second time in a row. The rest of the MPC will likely support keeping rates at their current levels.

United Kingdom (UK) consumer price index (CPI) data for August showed that core inflation – which excludes volatile items – accelerated to 3.6%, higher than markets expected. Services inflation, a gauge closely watched by BoE officials, rose sharply to 5.6% from 5.2% in July.

While the BoE is expected to keep interest rates steady, investors will focus on guidance for the rest of the year. Financial market participants currently expect the BoE to cut interest rates once more in any of the remaining monetary policy meetings.

Daily market reasons: Sterling beats US dollar on firm Fed bets

• Sterling climbed to near 1.3250 against the US dollar, the latter falling sharply on growing speculation that the Fed’s easing cycle will be deeper than previously expected. The US Dollar Index (DXY), which tracks the greenback against six major currencies, is retreating from a five-day high of 101.50.
• The Fed on Wednesday offered a 50 basis point (bp) interest rate cut, signaling the central bank is confident inflation is falling to the bank’s 2% target and is increasingly concerned about deteriorating conditions on the the labor market. Fed Chairman Jerome Powell dismissed fears that the United States (US) economy could enter a recession: “I don’t see anything in the economy right now that suggests the likelihood of a recession,” he said, adding that “you see growth . at a solid rate, you see inflation coming down and you see a labor market that is still at very solid levels.”
• Fed officials expect the federal funds rate to reach 4.4% by the end of the year, suggesting the Fed will cut interest rates by an additional 50 bps. According to the CME FedWatch tool, the probability that the Fed will cut interest rates by 25 bps to 4.50%-4.75% in November is 65.6%, while the rest favor a rate cut of 50 bps.
• Analysts at Citi see the Fed cutting interest rates again by 50 bps in November. “Powell has noted several times that today’s 50bp cut is a ‘commitment’ not to get behind the curve, suggesting that the bar for further big rate cuts is very low. We continue to see risks being balanced towards a faster easing of labor market data and a more aggressive pace of rate cuts.”
• In Thursday’s US session, investors will focus on initial jobless claims data for the week ending September 13. First-time jobless claimants are expected to have held steady at 230,000.

Technical analysis: Sterling aims to recover 1.3300

Sterling is nearing 1.3300 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.