Sterling refreshes two-and-a-half-year high at 1.3380 against the US dollar

• Sterling is moving higher to near 1.3380 against the US dollar on expectations of shallow BoE policy easing cycle.
• Britain’s overall business activity grew at a slower pace in September, according to a flash estimate.
• Traders are raising bets on a 50 bps Fed rate cut for November.

The British pound (GBP) continues to gain against its major peers on Tuesday. The British currency is strengthening as investors expect the Bank of England’s (BoE) policy easing cycle to be shallower than other central banks in the Group of 7 (G-7) countries.

Financial markets expect the BoE to cut interest rates once more this year at either of the two remaining monetary policy meetings this year. High inflation in the United Kingdom (UK) services sector appears to be the main reason behind market expectations for a less hawkish BoE interest rate outlook.

Annual services inflation, which is closely watched by Bank of England officials, rose sharply to 5.6 percent in August from 5.2 percent in July.

Meanwhile, BoE Governor Andrew Bailey’s comments in his speech during the European trading session on Tuesday indicated that the policy easing cycle will be gradual.

On the economic front, Flash UK S&P Global/CIPS Purchasing Managers Index (PMI) data for September fell slightly but remained above the 50.0 mark that separates expansion from contraction. The report showed total private business activity fell to 52.9 from 53.8 in August, due to a faster-than-expected slowdown in activity in both the manufacturing and services sectors.

Daily Market Reasons: Sterling advances towards 1.3400

• The British pound extended its winning streak for a fifth day of trading against the US dollar (USD) on Tuesday. GBP/USD climbs above 1.3350 as the US dollar eases on growing speculation that the Federal Reserve (Fed) could opt for a 50 basis point (bps) rate cut for the second time in a row, when they meet in November. The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, remains under pressure below 101.00.
• The Fed began cutting interest rates at its monetary policy meeting on Wednesday, where the central bank cut its key lending rates by 50 basis points (bps) to a target range of 4.75%-5.00 %. The Fed kicked off its policy easing cycle with a bigger-than-usual rate cut as officials focused mainly on staving off job losses, with increased confidence that price pressures would return to the bank’s 2% target .
• According to the CME FedWatch tool, the probability that the Fed will cut interest rates by 50 bps to 4.25%-4.50% in November is close to 51% from 29% a week ago.
• This week, investors will be paying close attention to the US Personal Consumption Expenditure (PCE) price index for August, which will be released on Friday. Economists expect the core PCE price index to have risen 2.7 percent from 2.6 percent in July.

Technical Analysis: Sterling continues to rise to 1.3380

Sterling is further up at 1.3380 against the US dollar in European trading hours. The short-term outlook for GBP/USD remains firm as all short-term and long-term exponential moving averages (EMAs) are trending higher.

In early September, 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 has seen a sharp rise after a breakout of 21 August.

The 14-day Relative Strength Index (RSI) is moving above 60.00, suggesting bullish active momentum.

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