Sterling Struggles Near 1.3400 As US PCE Inflation Takes Focus

• Sterling faces pressure near 1.3400 against the US dollar ahead of US PCE inflation data for August.
• Market expectations for a 50 basis point Fed rate cut in November have eased slightly.
• The BoE is expected to cut interest rates once in the last quarter of the year.

The British pound (GBP) continues to face selling pressure near the round-level resistance of 1.3400 against the US dollar (USD) in the London session on Friday. GBP/USD’s rally appears to have stalled as investors focus on United States (US) August Consumer Price Index (PCE) data due at 12:30 GMT.

Core US PCE, the Federal Reserve’s (Fed) preferred inflation gauge, is estimated to have risen 2.7% on the year, faster than the 2.6% increase seen in July, while monthly prices are expected to have grown steadily by 0.2%.

The data is likely to influence market speculation for Fed rate cuts in November. Markets are almost evenly split on whether the US central bank will cut rates again by 50 basis points or 25 basis points lower.

According to the CME FedWatch tool, the likelihood that the Fed will cut interest rates by 50 basis points in November fell to 51% from 57% on Thursday. If the PCE data showed signs of a further slowdown in inflationary pressures, market expectations for a big interest rate cut would increase. On the contrary, hot inflation figures would weaken the chances of this scenario.

The significance of U.S. inflation data has declined recently as Fed officials appear confident that price pressures will return to the bank’s 2 percent target. Policymakers have also become more vigilant about labor market risks. Last week, the Fed kicked off its policy easing cycle with a larger-than-usual rate cut of 50 basis points (bps) to 4.75%-5.00%, signaling that officials will all that is needed to revive the strength of the labor market.

Daily market reasons: Sterling looks set for another week of gains

• Sterling underperformed its major peers, excluding Asia-Pacific currencies, on Friday. The British currency weakens as investors turn cautious ahead of PCE inflation data.
• There is no headline economic data in the United Kingdom (UK) this week or next. GBP will therefore be influenced by market expectations for Bank of England (BoE) monetary policy action for the remainder of the year.
• Financial market participants expect the BoE to cut interest rates once at either of the two remaining policy meetings this year. The BoE moved to normalize policy with a 25bp interest rate cut in August to 5%, but left rates unchanged at last week’s meeting.
• On Tuesday, BoE Governor Andrew Bailey said in an interview with the Kent Messenger newspaper that “the path for interest rates will be gradually downward,” Reuters reports. Bailey’s comments suggest he is confident inflation will return sustainably to the bank’s target of 2. He did not provide a specific neutral rate but assured they would not return to historic lows as seen during times of pandemic.

Technical Analysis: Sterling struggles to climb above 1.3400

Sterling eases as it struggles to extend its gains above key resistance at 1.3400 against the US dollar in European trading hours. GBP/USD faced selling pressure after hitting a new more than two-year high above 1.3430. The cable’s near-term outlook remains firm as the 20-day exponential moving average (EMA) near 1.3235 is sloping 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 made a sharp rally after a breakout of 21 August.

The 14-day Relative Strength Index (RSI) is trending lower but remains 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 20-day EMA near 1.3235 will be key support for GBP bulls.